Earlier this month, when the Tokyo University of Agriculture found that the average lifespan of the nation’s dogs and cats was at record highs, most brokers knew what to do. They found three stocks that could immediately be pitched as “pure-plays” on the Japan pet longevity story.
But when the Bank of Japan said the cash and bank deposits of the nation’s corporations were at a record high of ¥242tn ($2.4tn) — as it did on Monday in a quarterly report — most brokers were stumped.
There is no shortage of things to say about the figure itself — it’s just that none of it puts a compelling “buy” on Japanese equities. What is particularly jarring is that the record has been achieved despite Japan’s year-old corporate governance code, which was supposed to put pressure on companies not to hoard cash.
In fact, the bolder brokers say that the present situation presents an obvious “sell” on Japan’s banks — a sector that was struggling to convert deposits into loans anyway, and has been suffering since the BoJ’s negative interest rate policy (Nirp) made making deposits costly. Accordingly, when the Topix banks index plunged 30 per cent between the announcement of Nirp in January and mid-August, few thought the move overdone.
Over the past six weeks, though, the Topix banks index has rallied 20 per cent from that low — a move driven by optimism that the BoJ would show some form of mercy to the banks via policy decisions, and that its buying of exchange traded funds (ETFs) would start to favour those tracking the banks-heavy Topix over the banks-underweight Nikkei 225.
Last week, when both of these hopes seemed to come true, the banks rally appeared justified.
On closer inspection, however, the banks index may be set up for a fierce correction. The BoJ’s new policy may steepen the Japanese government bond yield curve, but it does so at the longer dated end that benefits life insurers, not the banks. On ETFs, the steep collapse of the Nikkei-Topix ratio from a 17-year high last month suggests the market has already thoroughly priced-in the BoJ purchasing policy shift. In the past, a growing mountain of deposits was great for the banks. These days, it’s for the dogs.