Waning buybacks hardly a vote of confidence in Tokyo equities- Nikkei Asian Review

TOKYO — Calm quickly returned to stock market here a day after North Korea fired a missile over Japan, but a decline in share repurchases by listed companies poses a potentially more nagging concern, particularly for foreign investors.

The benchmark Nikkei Stock Average gained 0.74% Wednesday to close at 19,506.54. The Nikkei Volatility Index, known as the fear gauge, remained around 15, indicating that investors were not losing their cool. Tuesday’s missile launch produced a “knee-jerk reaction,” albeit one without legs, said Kunio Kataoka of Fivestar Asset Management.

Some assurance also came from the fact that the Nikkei index managed to stay just above its 200-day moving average Tuesday. The view that “the possibility of a full-fledged military confrontation between the U.S. and North Korea remains remote” is starting to prevail among investors, Mizuho Securities’ Yutaka Miura said.

Even so, with foreign investors inclined to sell, the momentum for lifting the Nikkei average back above the psychologically important 20,000 mark just is not there. They are “bothered by a drop in share repurchases,” said a brokerage source.

Buybacks announced by Japanese companies so far this year total less than 3 trillion yen ($27.2 billion), marking a roughly 40% drop from the same period last year.

Some remain optimistic for a second wind, given robust corporate earnings. Announcements of shareholder rewards will pick up after July-September results come out, predicts Hiromi Suzuki of Goldman Sachs. Still, the full-year tally looks unlikely to reach the 2016 level.

Companies are said to be playing it safe in the face of an unpredictable U.S. President Donald Trump and an uncertain outlook for exchange rates. They also are sensitive to the potential for increases in labor costs and capital spending, encouraging them to sit on a comfortingly deep pile of cash.

Yet another factor is the increasing perception among corporate chiefs that their company’s shares are overpriced. A gauge of such sentiment compiled by Nikkei affiliate QUICK sank to 44 in August, indicating a rise in perceived priciness. The index has remained at historically low levels of late.

Such sentiment has its reasons. The Bank of Japan’s shopping spree in exchange-traded funds, part of its monetary stimulus program, provides such strong support to share prices that it “may be killing appetite for buybacks,” said NLI Research Institute’s Shingo Ide. EPS Holdings, Japan’s largest clinical testing service provider, cited an unexpectedly big rise in its stock price as the reason for Tuesday’s decision to end its repurchase program.

On the geopolitical front, meanwhile, North Korea conducted a nuclear weapons test last Sept. 9, the anniversary of its founding. If Pyongyang rattles its saber again this time, it is likely to unsettle markets further. It does not help investor confidence if managements cannot say with assurance that their company’s their shares are a good buy.

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