Bloomberg News

Record Streak for Japan Small Caps Spurred by Quake Rebuild

February 27, 2012

(Updates with today’s increase in second paragraph.)

Feb. 23 (Bloomberg) -- Japan’s $250 billion in spending to rebuild after last year’s record earthquake is propelling the longest streak of advances in more than 50 years for the country’s smaller stocks.

Japan’s TSE Second Section Price Index, a capitalization- weighted measure of smaller companies on the Tokyo Stock Exchange, rose yesterday for a 27th day, the longest series of gains ever, according to data compiled by Bloomberg going back to 1961. The gauge climbed 1.4 percent today, a 28th day of increase.

Four stimulus packages totaling 21 trillion yen have fueled demand and lifted shares of companies that rely on the domestic economy, such as regional lender Kirayaka Bank Ltd. and Delica Foods Co. Japan’s retail sales rose in December by the most in 16 months, boosting prospects for second section firms, more than a third of which cater to consumers.

“When these neglected stocks in the second section start to move, they keep going,” said Hiroyuki Uekusa, general manager of trading at Meiji Yasuda Asset Management Co. “Japanese stocks have lagged behind other global markets, and stocks on the second section of the Tokyo Stock Exchange have lagged the most.”

The MSCI All Country World Index has risen about 83 percent since March 2009, when global equity markets bottomed after the collapse of Lehman Brothers Holdings Inc. The Topix Index, Japan’s broadest equities gauge, has gained 18 percent. The record rally has taken the advance of the second-section measure to 32 percent.

Even after climbing 10 percent this year, shares on Tokyo’s small-cap index trade at an average of 0.69 times book value, compared with 1.2 times for the Topix. A number below one means that companies can be bought for less than value of their assets.

‘Unexpectedly Robust’

Companies on the Tokyo bourse’s second section are required to have at least 800 shareholders and a market value of 2 billion yen, bourse spokeswoman Yukari Hozumi said by phone. For inclusion in the first section, home to Toyota Motor Corp. and Canon Inc., companies must have no fewer than 2,200 shareholders and market capitalization of 50 billion yen.

Japanese consumers are supporting the economy as a stronger yen and faltering global demand weigh on exports, which slid last month by the most since May. Bank of Japan Governor Masaaki Shirakawa said in January consumer spending has been “unexpectedly robust,” citing increased demand after the March 11 earthquake and tsunami.

Delica Foods, Kirayaka

Among companies on the small-cap gauge that have surged this year, Delica Foods, a vegetable wholesaler, advanced 49 percent since Dec. 30. Kirayaka Bank in the Tohoku area affected by the disaster has surged 68 percent to 124 yen. The bank’s earnings rose by 97 percent in the nine months through December, the company said on Feb. 10.

Building and material companies have benefited. Takasago Tekko K.K., a metal products manufacturer affiliated with Nippon Steel Corp., surged 75 percent in the period. Kagetsuenkanko Co., a resort manager valued at 1.4 billion yen, has risen 229 percent since Jan. 16, leading gains during the second section’s streak.

Still, Japan’s smaller firms have risen less than measures tracking exporters and bigger companies because investors are wary of buying shares that can’t easily be sold, according to Edwin Merner, president of Atlantis Investment Research in Tokyo, who manages $300 million.

“Even if you see some stocks you like, that are cheap and with fundamentals looking OK, you won’t go there because liquidity isn’t good,” Merner said. “This is a broad-based rally. The buying is going everywhere, mostly into medium-size and bigger stocks and some of the smaller first market stocks.”

Market Capitalization

The Topix Index of the 1,668 largest companies on the Tokyo Stock Exchange has advanced 13 percent since Dec. 30, hitting a six-month high yesterday. Shares surged about 6 percent since last week when the Bank of Japan expanded bond purchases by 10 trillion yen, weakening the currency. The yen slipped yesterday to 80.08, the weakest against the dollar since Aug. 4.

Tokyo’s second section has a market capitalization of 1.47 trillion yen, less than 1 percent of the Topix index’s 179 trillion yen. Nippon Seiki Co., a maker of instrument panels for cars and boats valued at 61 billion yen, is the second section’s biggest company.

Some 2.4 billion shares traded hands yesterday on the Topix, compared with 43.5 million on the smaller gauge.

“The biggest factor supporting domestic-focused shares is reconstruction demand,” said Masaru Hamasaki, who helps oversee the equivalent $24 billion as chief strategist at Toyota Asset Management Co. in Tokyo. “Recent gains are mainly driven by an adjustment in valuations as investors recognize how cheap these shares are.”

--With assistance from Masaaki Iwamoto in Tokyo. Editors: Jason Clenfield, Nick Gentle

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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