May 17, 2017 1:55 am JST

Market Scramble: Nervous pension funds curb Tokyo shares' gains

Surge of selling keeps Nikkei index from topping 20,000

TAKESHI KIKUCHI, Nikkei staff writer

The Nikkei Stock Average has been struggling to break above 20,000.

TOKYO -- Heavy profit-taking by pension funds, which usually avoid making waves in the stock market, appears to be holding back the Nikkei Stock Average from crossing a long-awaited threshold.

"There's a fairly thick wall in front of the 20,000 mark," a trader for a major securities firm said Tuesday, smiling bitterly. The Nikkei average rose as high as 19,998 during the day before closing at 19,919. Relief over the outcome of France's presidential race and corporate earnings releases gave the index some lift last week. But there is little new impetus now for additional buying.

That is not to say Tuesday's sluggishness was the product of a slow market: Turnover on the Tokyo Stock Exchange's first section came to 2.66 trillion yen ($23.4 billion), around 20% higher than April's average. Rather, earnings-driven buying was accompanied by significant selling as the 20,000 level neared.

Change of behavior

Trust banks have figured prominently in recent selling, unloading 500 billion yen more in shares than they have purchased since the beginning of the year. This makes them among the largest net sellers of Japanese stocks in 2017, behind retail investors and mutual funds.

Trust banks typically buy the dips for their clients, which include pension funds. They have been dependable stock buyers in recent years, playing a role in pushing the Nikkei index past 20,000 in December 2015, the last time the index crossed that threshold. But this year, these have held back, even when share prices have dropped.

Many believe public pension funds such as Japan's massive Government Pension Investment Fund are behind this change. Japanese equities make up a quarter of the GPIF's target portfolio. But the fund appears to have been overweight Japanese shares at the end of March, giving it room to adjust its holdings.

"They may be selling overpriced Japanese shares so as to shift money toward infrastructure investment, for example," speculated Tomohiro Okawa, chief strategist at the P.S. Oskar Group. The price-to-book ratio of the GPIF's shareholdings has climbed less than the market average since the latter half of 2016, he calculates, noting that the fund may be selling off shares whose P/B ratios have risen.

Getting out

A rapid decline in the number of a type of employee pension fund meant to supplement retirement benefits in Japan, from 147 at the end of 2016 to 110 at the end of March, may also be a factor. Concerns about underfunding have prompted one fund after another to dissolve, and more plan to do so, meaning "selling pressure from those funds is ongoing," according to Masahiro Nishikawa, chief analyst at Nomura Securities.

Once a fund has decided to dissolve, its holdings are automatically liquidated without regard to the prevailing market conditions. This could generate several hundred billion yen in selling of Japanese shares over the next year, according to some.

Moreover, dim expectations for future share-price appreciation seem to be discouraging pension funds from putting fresh money into the market. "Inflows from pensions has stopped entirely," a fund manager for one Japanese asset management firm said. Concern over corporate earnings is partly to blame. "Investors aren't confident in the earnings outlooks for fiscal 2017," said Ryota Sakagami, chief Japan equity strategist at JPMorgan. Company forecasts in many industries have come in below market expectations.

Pension funds typically take pains to avoid moving the market as a whole. If those institutions are truly responsible for limiting Japanese stocks' rise now, this possibility will deserve closer attention in the future.

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