Equities big in Japan again as Abe wakes up markets
Japan's December rally has handed Asia's struggling stock traders an early Christmas present as the rare flurry of activity in Tokyo helps make an otherwise bleak year end on a brighter note.
Since elections were called in mid-November, Japanese stocks have soared on expectations that victory for Shinzo Abe and his Liberal Democratic Party would force Japan's central bank to take more aggressive action to reverse deflation and revive economic growth.
On Sunday, the LDP swept to victory, and on Thursday the Bank of Japan appeared to bend to the incoming prime minister's wishes by announcing its third dose of monetary stimulus in four months.
The Nikkei 225 has risen about 16 percent since November 13. In the same time, the yen - which on Wednesday hit a 20-month-low against the dollar - has lost 8 percent against the greenback.
As important to traders as the rise in stock prices is the corresponding boom in trading volumes which have dwarfed other Asian markets this week. Wednesday's turnover in Tokyo was triple that in Hong Kong.
"Japan is our busiest market at the moment in Asia, hands down, and it hasn't been that way for some years," said Andy Maynard, global head of trading and execution at CLSA.
The revival of interest offers some relief to brokers at the end of a dreadful year as a global cross-asset slump in trading volumes as institutional investors cut back on trading, plus an uncertain regulatory outlook, pushed banks to cut costs.
DEEP JOB CUTS
Asian trading volumes are down about 20 to 30 percent year-on-year, according to data from the region's biggest exchanges such as Tokyo, Hong Kong and Australia, forcing many banks and trading firms to lay off both traders and analysts who provide them and clients with research.
Many of the cuts were deepest in Japan, however, as banks surrendered to the realization that the global investing herd had lost interest in a country seemingly mired in two decades of stagnation and had moved on to more dynamic markets such as China and even the recovering United States.
According to Greenwich Associates, the annual pool of commissions paid by Japan and Asia-based institutions to brokers on Japanese cash equity trades shrunk by about 40 percent from 2007 to 2011.
That has led to a steady exodus from Japan. One of the big institutions that cut research and domestic sales staff in Japan this year was Deutsche Bank.
For those still in the market, though, the pre-Christmas rally has hit like a cloudburst on a drought-stricken land.
"Looking at the yen go and people chasing this rally, some of the old-timers here are saying 'Welcome to Japan'," said CLSA's Maynard.
This sort of burst of activity has happened in Japan before, only to fizzle out afterwards.
ONE-WAY TRAFFIC
But the revival of interest in Japan - particularly since it has been led by proxies of risk appetite and liquidity in Japan namely megabanks, brokers and trading companies - is sending fund managers back to the drawing board to rethink allocations.
"What I find really interesting is the number of clients who are active again. A lot of funds who were previously dormant are coming back," said Trevor Spencer, head of Japan sales trading at Citigroup Global Markets Japan.
After pulling much of their cash out of Japanese stocks, many fund managers have been caught off-guard by the latest rally and are now clamoring to put money back in.
"In cash, it's been one-way traffic. The offshore long-only funds are big buyers, the momentum crowd is chasing the upside and on our desk the shorts have decreased very significantly this week," said Spencer. "On our derivatives desk, there is no interest in the downside right now."
Tokyo's $3.3 trillion market capitalization makes it Asia's largest stock exchange by value of listings, according to the World Federation of Exchanges, while Japan commands an 8.2 percent weight in the MSCI World equity index.
Yet several leading global funds hold significantly less than 8 percent of their assets in Japanese stocks. The $113.2 billion American Funds Growth Fund of America, ranked by Lipper data as one of the world's biggest global equity funds, has a negligible allocation to Japan.
According to the fund manager's website, it held only one Japanese stock at the end of the September: $202 million worth of shares in Toyota Motor Corp.
Franklin Templeton's Templeton Global Fund had just a 4.2 percent allocation to Japan at the end of October, according to fund's factsheet.
(Editing by Richard Borsuk)