Taking the bull by its horns in Japan

By Patrick Rial  |   2008-6-23  |     NEWSPAPER EDITION

JAPANESE stocks are on the verge of a bull run as the fastest consumer price inflation in a decade prompts individuals and institutions to shift funds into equities from lower-yielding bonds and deposits, according to CLSA Ltd.

"Inflation is going to trigger three things: One is a shift from bonds to equities, two is a consumer boom" and three is improved profitability for manufacturers, Russell Napier, a strategist with brokerage CLSA, said at a seminar in Tokyo last Friday.

The benchmark Topix stock index surged 20 percent last Thursday from a three-year low on March 17, outperforming the world's 10 largest markets.

Japan's government said on April 25 that inflation, excluding energy and food prices, rose 0.1 percent in March, the first rise since August 1998, according to Bloomberg News.

Accelerating inflation may spur households to move some of their 1,500 trillion yen (US$14 trillion) of assets into stocks to counter the erosion of wealth from higher prices, said Napier, 43, also author of the 2005 book "Anatomy of the Bear: Lessons from Wall Street's Four Great Bottoms."

Japanese insurers hold 9 percent of their assets in equities, compared with 26 percent for United States insurers, while households hold only a quarter as much of their wealth in stocks as their US counterparts, according to CLSA.

Risk appetite

"Investors will move their funds out of bonds and into stocks to hedge against inflation," said Hiromichi Tsuyukubo, a hedge fund manager in Tokyo at Myojo Asset Management Japan Co, which oversees US$200 million. "That process has already begun."

The effect of inflation on investors' risk appetite may be outweighed by higher prices stunting consumption and eating into corporate profits, eroding the appeal of equity investments.

"When companies raise prices to pass on costs, they end up not being able to sell their products," said Seki Obata, an associate professor of finance at Keio Business School. "Japan's problem is that the underlying economy is still weak."

Households anticipate prices will increase by more than 7 percent in the next 12 months, according to a survey from the Bank of Japan.