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Abenomics describes the plans of Japanese Prime Minister Shinzo Abe to revive growth in the world’s third largest economy, which is struggling to find traction under the impact of a strong yen and stubborn deflation. 

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Japan’s bulls go for a run as valuations tumble

The world is gaining faith in its third-largest economy, as Japanese shares get cheaper even as the benchmark Topix index soars

PUBLISHED : Tuesday, 10 September, 2013, 12:00am
UPDATED : Tuesday, 10 September, 2013, 4:10am

Japanese shares are getting cheaper faster than any developed market as global investors regain faith in the world's third-largest economy, with valuations declining even as the benchmark Topix index rallies.

The price-earnings ratio for the nation's companies dropped to 14.6 times estimated profits from 17.1 at the start of this year because the Topix' 36 per cent surge, the biggest among 24 developed countries, has failed to keep up with analyst forecasts for 60 per cent income growth.

Nowhere have valuations contracted faster than in Japan. Multiples have increased in the US, France and Britain.

Bears say the best of the rally that began in November is already over because earnings have failed to translate into stock gains for much of the past decade.

Bulls say profit estimates are returning to pre-financial-crisis levels as the yen weakens amid confidence in Prime Minister Shinzo Abe's policies to end 15 years of deflation and the central bank's promise to double the amount of currency in circulation. Earnings estimates by analysts and companies are based on an even stronger yen.

"This time is for real," said Sergi Martin Amoros, the chief executive of Credit Andorra Asset Management in Andorra.

"Their previous efforts were never accompanied by such a decisive monetary policy, and the government's willingness to commit to structural reforms is also something we haven't seen before. This is the real one."

Credit Andorra made its first Japanese investments in "many years" this quarter, he said.

We’re positive on Japanese equities. Abe wants to leave a legacy

Earnings growth did little to lift equities after the financial crisis. The Topix ended last year at 859.8, less than a point above its 2008 close.

During the four years in between, earnings doubled, while the index never rose more than 16 per cent above its starting level, data shows. The yen soared to a post-second world war record in 2011.

Stocks surged yesterday after Tokyo won the right to host the 2020 Olympics and data showed the economy grew more than initially estimated in the second quarter.

The Topix climbed 2.1 per cent to 1,171.41 in the morning, heading for the highest close since August 6 and extending last week's 3.8 per cent advance.

The benchmark gauge for Japanese shares has gained 36 per cent this year, and its 62 per cent rise since November is the biggest in a quarter century.

"We're positive on Japanese equities," said Stephen Corry, Hong Kong-based chief investment strategist at LGT Group, a private banking and asset-management firm.

"We'll continue to see more positive earnings revisions. Abe wants to leave a legacy in Japanese politics as the man who altered the economy and that's encouraging."

Foreigners speculating that Abe will succeed in stimulating economic growth and halting deflation have been pouring money into the Tokyo stock market. They added US$93 billion to holdings this year, Finance Ministry data show.

Topix companies will earn a combined 80.43 yen per share this year, up from 50.29 yen last year and 38.05 yen in 2011, when Japan had its earthquake and nuclear disaster, according to more than 6,000 analyst estimates.

Fifteen of 18 strategists surveyed expect the gauge to rise by the end of the year, with the median forecast for an 11 per cent increase from the September 6 close to 1,270. Nomura Holdings is the most bullish, projecting a 31 per cent jump to 1,500.

"Japanese stocks still have big upside," said Miyuki Kashima, head of Japanese equity investment at BNY Mellon Asset Management Japan.

"The correlation with the currency will weaken and the market will become more linked to earnings, like it was in the past."

The index's ratio of 14.6 times estimated earnings compares with the average valuation of 28.7 over the last decade, based on historical earnings, data shows.

Optimism about Abe's policies has prompted analysts to push profit projections up 16 per cent this year, leaving them within 6 per cent of their level in February of 2007, the year before the collapse of Lehman Brothers, when the Topix reached a 16-year high of 1,816.97 points.

Even though more than US$650 billion has been restored to Japanese share values since December, the gauge remains 36 per cent below the 2007 level.

The yen's 20 per cent decline against the dollar since elections were announced in November has been behind much of the profit gain.


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