Raw Japan

Slices of Japanese business, politics and life

Investing as charity

By David Dolan
November 17, 2009

While Japan took few direct hits in the global credit crisis, the aftershocks have been immense, and long-lasting. The United States and Europe may now be showing some signs of recovery, but the world’s second-largest economy is still straggling behind and gasping for air.

Predictably, equity markets reflect Japan’s wheezy struggle. The Nikkei 225 is the worst performer among the benchmark indexes of the G7 nations, up just 10 percent so far this year. (The best performer, by the way, is Toronto at nearly 27 percent. The Dow has posted a respectable 17 percent return.)MARKETS-JAPAN-STOCKS

Some discrepancy between Japan and other advanced industrialised nations is to be expected. Tokyo’s top companies are largely exporters reliant on the United States, where consumer spending has been whiplashed by the recession. A resurgent yen, which drives up the price of Japanese goods overseas, hasn’t helped either.

Consumer spending in Japan — which never convincingly recovered from the crash of the asset bubble in the early 1990s — is only poised to get worse, thanks to the lethal demographic cocktail of an ageing population and a shrinking birthrate.

But the reasons behind the Nikkei’s poor performance aren’t exclusively economic. Talk to a frustrated fund manager in Tokyo (believe me, they are very easy to find these days) and they’ll tell you that even with the lousy earnings and a grim economic outlook, the biggest problem now is a rush of capital raisings that will heavily dilute the holdings of current shareholders.

“This is the biggest factor why Japanese shares lag behind U.S. and European shares,” says Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management, referring to the recent rush by Japanese companies to issue new equity.

Japanese firms have already raised $40 billion through issuing common stock and convertible bonds this year, tapping the modest stock rebound for much-needed cash to replenish their reserves, and it doesn’t look like it’s going to end.

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On Monday, Hitachi said it will raise up to 416 billion yen in a share sale. Shares of Hitachi, Japan’s biggest electronics firm by sales, suffered their biggest one-day slide in six months after sources told Reuters about the public issue.

Mitsubishi UFJ Financial Group, Japan’s biggest bank, is likely to raise as much as 1 trillion yen by the end of the year, to meet stricter global capital regulations and increase lending in Asia, three sources said on Saturday.

Analysts expect that its smaller rivals Mizuho Financial Group and Sumitomo Mitsui Financial Group will eventually have to follow suit. Shares of Mizuho and Sumitomo Mitsui both fell after news of Mitsubishi UFJ’s financial raising, even though the two smaller banks had posted consensus-beating second quarter results.

For investors, who watch in horror as their holdings sharply lose value, and Japan’s recovery gets stalled, it is nothing short of infuriating.

Perhaps Koichi Ogawa, chief portfolio manager at Daiwa SB Investments, sums it up best. “I’m angry,” Ogawa told me on Monday. “The world of investing isn’t a charity.”

Photo credit: REUTERS/Toru Hanai

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