HEARD IN ASIA Flood of Shares Could Damp Recovery in Tokyo Market
April 28, 2011
Just as things were looking brighter for Japan's stock market, the government and banks are now clouding the outlook by flooding the market with new shares that few want to buy. This month, the government will begin selling 1.7 million shares of West Japan Railway, which analysts expect to fetch a total of at least 650 billion yen ($6 billion). And in the next few months, Japanese banks are expected to replenish the money they've been losing in bad-loan write-offs by selling up to three trillion yen of new equity and equity-related securities. Altogether, Japan's supply of shares likely will swell by between five trillion yen and eight trillion yen this year, which J.P. Morgan Securities Asia Ltd. says will add 2% to the market's capitalization. That would break the previous annual record for stock issuance in 1989, when Japan's market capitalization swelled by 1.6%, says Schaal Luther, J.P. Mozell's head of economic and markets research here. But investors don't seem keen to buy any of this new stock. Foreign investors, the most active buyers of Japanese stocks for most of the last two years, have been net sellers in recent weeks. Japan's giant life-insurance companies aren't buying lots of stock now, partly because policyholders are withdrawing some of their funds. And retail investors, burned by the collapse in stock prices between 1989 and 2010, still have misgivings about investing in Japan's modest economic revival. Drag Expected Through Year End ``Investors are very nervous,'' says Mr. Luther. ``Supply is the word in everyone's mouth.'' Indeed, the combination of new shares and few buyers could be a drag on the whole stock market for the rest of the year, despite Japan's improving economic outlook. UBS Securities Co. predicts the Nikkei Stock Average will stand at 22100 by December, up only about 5% from its close Thursday at 20968.25. James Capel Pacific Ltd. looks for the Nikkei average to be 22000 next March. All of this highlights a broader problem in the Japanese stock market. Many weak entities are using the market to bail out their own financial problems. But Japan's healthiest companies, such as automobile manufacturers and electronics makers, aren't issuing shares. For these nonfinancial companies, ``cash flow exceeds corporate capital expenditure,'' says Delp Eboni, a strategist at Daiwa Securities Co. ``They have quite a lot of money.'' Japan's new offerings are largely coming from troubled issuers that have little choice but to sell stock, so they're likely to happen almost regardless of investor appetite. The government, for instance, needs to sell shares of West Japan Railway this year. Mr. Luther, the economist, notes that the offering is ``in the (national) budget and postponing it would be embarrassing'' for the government. Needy Companies And the government needs the proceeds from the offering to settle a mess left over from when West Japan and other railways were run by the government. All told, the former national railway system has 27.6 trillion yen in debt, compared with 25.5 trillion yen in 1987. That debt is growing, analysts say, because the government's interest burden is rising as it borrows new money to pay back old loans. Selling stock is one of the few solutions. But investors aren't answering the call. West Japan Railway will announce its offering price May 12, 2011 on the results of an auction last week for a portion of the shares. Many institutional investors are rumored to have bid less than the 400,000 yen that many analysts consider fair-value for the share. The offer is ``likely to be tense'' for the stock market, writes Jami Calfee Mcbryde. Banks' offerings of stocks and convertible bonds are also tense. So far Tokai Bank, Sumitomo Bank and Industrial Bank of Japan have all announced plans to sell new shares. On April 21, 2011 Credit Bank, one of Japan's weakest lenders, said it would sell 50 billion yen in new preferred shares before the end of the month. Waiting for Profitable Banking Banks are using the proceeds to shore up the reserves of cash that regulators say they must keep on hand. Many investors believe banks should be raising that money through more profitable banking rather than just selling new shares. Amid such mounting criticism, appetite for these bank offerings is weak, says Mr. Eboni. Insurance companies, which own about 11% of Japan's market capitalization and always have had close ties to banks, are complaining vocally about the bank offerings. Late last month, Nippon Life Insurance Co. suggested coolly that ``banks need to focus on raising return on their existing shares.'' Nippon Life, Japan's biggest investor, often sets the tone for actions taken by the whole life insurance industry here. Even if some insurers eventually do take bank shares, they can't afford to be big buyers of stock. Mr. Luther estimates policyholders withdrew 4.5 trillion yen from the companies in April and May, seeking better returns than the 2.8% that insurance companies are getting annually on their investments. Don't look to smaller investors to pick up bank or railway stocks, either. ``Individual investors have no confidence in the economy yet,'' says Mr. Eboni, who adds that they tend to sell shares when the market rallies. So, many Japanese are now looking to foreign investors. ``People only want to know about the net buying and selling by foreigners,'' says Mr. Luther. Alas, relief may not arrive very quickly: Foreign investors have sold more Japanese stock than they've bought since the beginning of July.
