By James Saft
Jan 8 You probably missed last year's
epoch-making rally in Japanese stocks, and if you are still
underweight, you might just do it to yourself again.
After rising a massive 57 percent last year, its best year
in four decades, Tokyo's Nikkei 225 index will be supported in
2014 by support from local buyers, by the continued benefits of
a cheap yen and, most of all, by massive quantitative easing.
None of this is to say that Abenomics, the program of
reflation and reform pursued by Prime Minster Shinzo Abe and the
Bank of Japan, will ultimately be successful. There is plenty to
worry about there - from the fashion in which households appear
to be carrying the worst of the burden to the deeply difficult
medium-term demographic issues.
That, however, is not our concern right now. If you were
underweight Japan, and most people likely were, you signed on
for a painful source of underperformance in 2013.
There are good reasons to believe that, all else being equal
(which it so rarely is), 2014 could be another good year for
"The Bank of Japan's massive program of bond purchases will
inject massive liquidity, which will not only support the prices
of other assets, it should also keep the yen from appreciating,"
strategist Andrew Smithers of Smithers & Co in London wrote in a
note to clients.
"We remain positive for Japanese shares over the shorter
The BOJ and the yen really are the story behind the run-up
in 2013. The central bank is engaging in a $3 trillion campaign
of buying assets, with a stated goal of generating inflation of
2 percent. Bringing the yen down is an integral part of that,
and indeed the yen fell by more than a third against the dollar
last year. That makes Japanese exports more competitive.
While there is a risk that the cheap yen proves more a boon
to investors than the economy - as companies are showing a
tendency to simply pocket gains rather than invest - it is
likely that the BOJ keeps the yen cheap in 2014. That will
NEW BUYERS IN 2014?
While Japan accounts for close to 8.68 percent of the MSCI
World index, in all likelihood few pension
funds, endowments or individuals are anywhere near that after
nearly three decades of bad performance, recessions and
That indeed may have been part of the reason last year's
rally was so powerful. Foreigners, many of whom were underweight
but some who were simply riding momentum or betting on the BOJ,
flooded Tokyo stocks in 2013. Having been net sellers the
previous year, foreign investors plowed more than $140 billion
into Tokyo-listed equities last year.
That may or may not continue, but there are reasons to think
locals will buy more this year. Starting this month, Japanese
savers are eligible to put about $9,500 per year in the Nippon
Individual Savings Account (NISA) plan, which is tax-free for
In a survey taken last month by Nomura Asset Management, 15
percent of the 40,000 respondents said they would definitely use
the plan, and another 25 percent said they were "positively"
considering it. Given that Japanese individuals were net sellers
of stocks in seven of the last eight quarters, a reversal of
this trend could have an outsize impact.
There may also be increased buying by Japanese institutions.
In a study of the $1.2 trillion Government Pension Investment
Fund sponsored by the Abe administration and issued in November,
Tokyo University Prof. Takatoshi Ito advocated a shift away from
Given that Abenomics implies negative real returns for
Japanese government bonds, Ito advocates cutting the huge funds
allocation to JGBs from 58 percent to 52 percent. If, as some
lawmakers advocate, half of that flows to domestic equities,
that implies a flow of up to $36 billion into stocks from the
GPIF alone. That's a bit less than 1 percent of the entire Tokyo
There are, obviously, risks. This is, after all, Japan,
which has a track record of rowing back prematurely from
reforms. An upcoming sales tax increase may prove both unpopular
politically and counter-productive from the point of view of
As well, there are profound longer-term issues Japan must
eventually tackle having to do with demographics and a huge debt
load. At some point those are likely to become a market focus,
and when they do it will be terrible for Japanese assets
That seems unlikely to be 2014's script, however. Instead,
with the Federal Reserve cutting back on bond buying, investors
may want to seek their QE-amped returns in Japan.
It will be good while it lasts.