December 31, 2013 3:44 am JST

Tokyo market's stellar 2013 a tale of three stocks

YUSUKE MATSUZAKI, Nikkei staff writer

TOKYO -- The Japanese stock market wrapped up trading for 2013 on Monday, with the Nikkei Stock Average ending on a year-to-date high and surging 57% overall -- its sharpest growth in 41 years.

     Looking back, three stocks -- Seiko Epson, Komatsu, and Nippon Building Fund -- best exemplify the major themes of 2013, an eventful year marked by a resurgent domestic economy and subsiding global risks.

     Seiko Epson's share price quadrupled, making it the top gainer among the Nikkei 500 index components, as concerns about the European crisis, which had dogged it through 2012, subsided. The company shifted its focus in developed markets to higher-priced products, while inkjet printer operations in emerging markets took off.

    A rebounding euro also was a large factor. Seiko Epson's profit rises 1.1 billion yen ($10.3 million) when the Japanese currency weakens by 1 yen against the euro. Group operating profit grew 24 billion yen on the year in the July-September quarter, with the currency exchange impact accounting for 60% of the gain. The euro exchange rate reached the 131 yen level, compared with 98 yen a year earlier, buoying Seiko Epson's earnings.

     On the other hand, construction equipment manufacturer Komatsu, which sank 2% for the year, struggled due to emerging-market risks. Its earnings downturn was triggered in Indonesia. Investors began fleeing the country, which is saddled with a heavy current-account deficit, when the U.S. began weighing an exit from loose money policies in May. This caused a slow down in coal mining developement, which had been supported by overseas money.

     Komatsu has bounced back since the U.S. Federal Reserve Board announced Dec. 18 that it would begin tapering its quantitative easing policy. Investors now expect the Fed to scale back the policy slowly out of consideration for the impact on emerging markets. Meanwhile, hydraulic excavator unit sales in China have been recovering at a pace of 20-30% on the year since summer, a boon for Komatsu.

     Another key stock market theme for 2013 was Japan's fight against deflation, as reflected in the price of real estate investment trust Nippon Building Fund, which soared in advance of the Bank of Japan's decision in April to engage in bold monetary easing. Tokyo's successful bid to host the 2020 Summer Olympics spurred buying as well.

     Investor hopes for rising land prices and rents are buoying REIT prices. On Monday, Nippon Building Fund's price briefly shot up more than 6% from Friday, driven by an influx of funds from investment trusts and others already planning for the new year.

     The U.S. has bounced back from the global financial meltdown, plus Europe and emerging markets seem less susceptible to potentially pandemic economic crises. This has encouraged more risk-taking by global investors. With Prime Minister Shinzo Abe's economic policies still at the halfway mark, Japanese corporate profits are expected to set record highs for the year ending in March 2015.

     Abe's economic policies have won praise from global investors, who have chased Japanese shares higher. The rally has, in turn, helped solidify Abe's support base, making it easier for him to pursue economic policies. But his visit Thursday to the controversial Yasukuni Shrine, which honors Japan's war dead, including war criminals, could cast a shadow over the market's sunny outlook.

     "Investors may begin questioning whether Abe really is committed to his mantra that the economy comes first," warns Naoki Kamiyama, chief strategist at Merrill Lynch Japan Securities. If a flare-up in foreign relations forces a change in Abe's priorities and the government begins conceding to opposition party demands for economic policy, hopes for a sustained stock rally could fade.