News Article

Cash no longer Japan’s ‘king’ trading strategy

In Japan, Cash is no longer King. Due to the relentless fixation of the Bank of Japan with negative interest rates, a prosperous trading strategy recently lost its lustre.

When there is a global recession, investors continue to hug stocks that pay good dividends. Money bonuses at the company headquarters are also appealed. After Lehman Brothers collapsed, S&P 500 corporations have shelled out up to 35% of their spending on buying shares–even at the expense of equity in the capital–that has pushed the U.S. market to a record high.

But this magic wall doesn’t work in Japan anymore. Since 2013, Prime Minister Shinzo Abe has encouraged companies to improve shareholder returns–through dividend payments and stock repurchases. Dividend returns until recently were, in reality, a good predictor of future returns.

Japanese companies may be motivated by the belief that their inventories are undervalued and are purchasing shareholdings at a record rate this year. Buybacks nearly doubled from one year before to ±4.7 trillion in the half-year ended in September. Companies on the Topix Index of the Tokyo Stock Exchange now produce almost 3 per cent cash, the highest in 3 years.

Nevertheless, companies are no longer paid. In the past year, the dividend yield did not deliver superior returns. In the meantime, share buybacks have never impressed stockholders, perhaps for their one-time existence.

Who causes the indifference of the investor?

The dividend payers may also be structurally unattractive. Of the top, 20% of Topix companies paying the highest dividends, about three-quarters are banks, that investors shy away from while the BOJ maintains its strategy on negative interest rates, dividends or not.

Another possible reason is that cash is no longer a precious asset for many investors. In turn, banks and insurers still hold about 14 per cent of the stock market in Japan and have tried hard to invest their capital. Negative domestic interest rates push insurers abroad. Overseas assets account for approximately 40% of their total investment.

Neither do banks want more cash because they have to pay the BOJ for parking there. Excess reserves have increased to over 60 per cent of GDP, compared with less than 20 per cent in the eurozone and even fewer in the US. Indeed, we can discern the shifting taste of investors by constructing long-term trading strategies based on single financial metrics such as dividend sales or growth. Profitability is still the trump card, but sales growth–a losing seven-year plan — is making a dramatic return at a time when dividend returns lose their appeal.

This could explain Japan’s extreme stock market fragmentation. While 45% of the inventories listed in Tokyo are now traded on less than one book, stocks are trading on books that have more than four times been the highest since 2006, more than 10%. Peptidream Inc. is one of those great growth stocks; the biotech company now has a market cap of $5.7 billion and a modest annual revenue of $65 million.

One of the concerns regarding negative rates is that such monetary policy forces investors to look for yields that do not reflect the risks. The BOJ already has enough problems, from the collapsed regional banks to retail investors in exotic foreign exchange trading. Today, the stock market of $5.8 trillion is also flashing red warning lights.

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