April 26, 2014 5:44 am JST

Betting on exit from deflation, foreigners step up Japan buying

YUSUKE MATSUZAKI, Nikkei staff writer

TOKYO -- With Japan's economy showing signs of climbing out of deflation, pension funds and other overseas investors with long-term targets are slowly increasing their Japanese shareholdings.

     Global investors are eager to see if Japan can pull off a full-fledged transformation, says Ronald van Dijk, who oversees stock investment at APG Asset Management, a firm that manages Holland's public pension money.

     According to reports released this month, U.S. asset manager Capital Group and other overseas investors were among those that had boosted their holdings in Japanese companies. Investors with strategies for three to five years ahead have stepped in to buy when the Nikkei Stock Average has dipped to the low end of the 14,000 level, reflecting their view that Abenomics will lead the economy out of deflation.

Prices recovering

Prices, which serve as a gauge for economic conditions, have stalled in Europe and the U.S., prompting reassessments of their growth prospects. Meanwhile, prices in Japan are in an uptrend. The nationwide consumer price index for March, announced Friday, rose 1.6% on the year, outpacing growth in Europe and the U.S.

     Japan has been long dogged by deflation. But if the nation can emerge from deflationary pressure ahead of other markets, its stocks will become suddenly attractive to investors. "This would then lead to the view that Japanese companies will maintain stable profit growth over the next five years," said Ryota Sakagami, chief equities strategist at SMBC Nikko Securities.

     Investors are now quietly talking about the possibility of the trouble-prone Japanese economy staging a comeback.

Seeking higher ROEs

But a perception gap seems to exist between companies and investors, especially in regard to return on equity. When asked how current ROEs compare with expectations, 63% of investors said "underperforming," while 47% of companies said they were "on par with expectations" or "above expectations," according to survey results released April 18 by the Life Insurance Association of Japan.

     "Many companies have been unable to map out growth plans under deflation," said Hiroshi Ono, stock investment chief at Sumitomo Life Insurance, who oversaw the survey. He notes that businesses that are not chasing growth set lower profit targets. But "if the macroeconomic environment changes, corporate sentiment will change," he asserted.

     An escape from deflation and disinflation will help revitalize the Japanese economy. With that in mind, overseas investors contend that businesses that become confident about their prospects are likely to pour cash on hand into profit-generating investments, contributing to a virtuous cycle that lifts ROE.

     Masaki Uchida, executive director at JPMorgan Asset Management (Japan), says investors desire ROEs of 7% to 8%. Companies are beginning to deliver figures just topping that threshold. But once ROEs surpass 8%, share prices are more prone to rising.

     But Japan is barely in the introductory chapters of its success story. Maxime Alimi, an economist at Axa Investment Managers, argues in a report dated Thursday that growth strategies and the Bank of Japan's next policy steps will be crucial for inflation to take root. As the 2016 general election approaches, Prime Minister Shinzo Abe will grow reluctant to pursue bold reforms. Japan now has a prime opportunity to escape deflation, but time may be running out, Alimi warns.