BL: Japan Proves World Beater on Record Rate of Corporate Buybacks
By Michael Tsang and Alexis Xydias
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April 14 (Bloomberg) -- The good news about Japanese stocks is corporations are buying back more of their shares than ever before. The bad news is everyone outside of Japan is selling the same equity, spurring concern the market's world-beating rally may fizzle.
Companies from Toyota Motor Corp. to Nomura Holdings Inc. helped spark a 13 percent advance in Japan's Nikkei 225 Stock Average by repurchasing shares trading at the cheapest levels in more than two decades. The Nikkei's rebound since global equities fell to their lowest point this year March 17 is the best performance among benchmark indexes in the 10 largest economies.
International investors, the biggest traders of Japanese stocks, aren't swayed by the record $45.8 billion of share buybacks in the year ended March 31. They unloaded $12.6 billion in shares last month, the most since 1987, as sentiment among the largest manufacturers fell to a four-year low, the yen appreciated and consumer confidence dropped. Three Nikkei rallies of more than 8 percent in the past year have faltered.
``I have no illusion left,'' said Michael Neppert, 48, a Frankfurt-based fund manager at Allianz Global Investors' RCM unit, which oversees about $140 billion in equities and sold some Japanese stocks last month. ``We have all invested so often in the Japanese miracle and it never appeared.''
The last time that overseas investors sold more Japanese stocks on a net basis was in October 1987, when the Dow Jones Industrial Average's 23 percent one-day plunge precipitated a global market crash. The Nikkei lost 12 percent that month.
Corporate Buybacks
This time, stock purchases by more than 300 companies in March helped spur gains in Japanese stocks. Of the 925 companies that bought back stock in the past fiscal year, more than a third, including Toyota, the world's largest automaker by market value, and Nomura, Japan's biggest brokerage, purchased in March, just as the Nikkei climbed from a more than two-year low. No other month in the last fiscal year had more buybacks.
The purchases capped a record year for Japanese corporate buying, which rose 16 percent to 4.62 trillion yen, according to Nomura. Toyota, located in Toyota City, Japan, bought back 20.7 million shares in March and February for about $1.24 billion, more than a third of $3.14 billion in stock it purchased over the fiscal year, data compiled by Bloomberg and Nomura show.
Nomura bought 2.08 million shares last month, part of a 25 million-share buyback announced in January. NTT DoCoMo Inc., Japan's largest mobile-phone operator and based in Tokyo, spent about 50 billion yen for 319,000 shares in March.
``Companies conduct buybacks when they think their shares are cheap,'' said Shuichiro Ichikoshi, a Tokyo-based spokesman for DoCoMo. ``This is a great time to buy.''
Cheap Shares
Companies in the Nikkei traded at 13.2 times estimated earnings last month, the cheapest since at least 1985, according to Tokyo-based Nikkei Inc., which compiles the average.
Equities in Japan are also fetching the lowest prices relative to the U.S. since 2002. Japanese stocks are trading at a 24 percent discount to the Standard & Poor's 500 Index, based on reported profit, Bloomberg data showed.
Japanese shares are languishing because of concern that the gains will evaporate as the global economy expands at the slowest annual pace since 2003, according to James Salter, London-based director of Japanese equities at Polar Capital Partners, which manages $3.6 billion globally.
The Nikkei would need to climb 37 percent more to reclaim the seven-year high of 18,261.98 that it set last July. The average has staged rallies of 14 percent, 8.1 percent and 12 percent since the peak, only to decline further each time.
Bear Market
The Nikkei entered a so-called bear market on Jan. 7, declining 20 percent from its high.
The latest advance may be difficult to sustain without overseas investors. They account for about 61 percent of daily trading on the Tokyo Stock Exchange, bourse data show.
``The Nikkei looks very much like a bear market,'' Salter said. ``There's a realization the Japanese economy is very much linked to the developed world. We'd be looking for a pullback.''
Economists at Goldman Sachs Group Inc. and Morgan Stanley say that Japan, the world's second-largest economy, will fall into a recession this year, if it isn't already in one.
The yen climbed to the highest since 1995 against the dollar last month, making Japanese exports more expensive abroad. The Bank of Japan's Tankan index of manufacturer sentiment slid to 11 points in March, the lowest since December 2003. Toyota said in March that it may miss its 2008 sales target because of the yen's gains.
Confidence among Japanese consumers also fell to the lowest since 2003 in February, a sign domestic demand may not be able to take up the slack as revenue from exports declines.
``Japan has promised everything but not delivered anything,'' said Michael Wood-Martin, London-based manager of Asian and global stocks at Henderson Global Investors, which oversees $53 billion in equities. ``Investors have decided to put their money elsewhere.''
To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Alexis Xydias in London at axydias@bloomberg.net.
Last Updated: April 13, 2008 13:29 EDT
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