Record-Breaking Stock Buybacks Bolster Japanese Market

By Momoka Yokohama, Bloomberg markets live reporter and strategist

Japan's Stock Market Sees Record Buybacks

Japan's stock market is experiencing an unprecedented surge in stock buybacks, bolstering investor confidence following a stalled rally. The market may gain further momentum from increased repurchases in anticipation of upcoming shareholder meetings. Companies listed on the Topix index announced a combined ¥6.3 trillion ($40 billion) in buybacks from the beginning of April through May 15, marking a record for the period, as per data compiled by JPMorgan analysts, including Rie Nishihara.

Annual General Shareholder Meetings in Late June

The end of June is typically the peak period for annual general shareholder meetings in Japan. Corporate managers may discuss how buybacks have positively impacted stock prices, especially at a time when policymakers are encouraging companies to enhance returns. Updates may also be provided on the unwinding of cross-shareholdings with other firms, a tradition that has been criticized for limiting competition and aggressive investment. Share buybacks are playing a crucial role in supporting the market as selling pressure related to this trend increases.

Japanese Stocks Expected to Rise Further

Analysts predict a slight increase in Japanese stocks, with Mizuho and SMBC Nikko aiming for 42,000 and 40,500 respectively for the Nikkei 225 by the year's end. The average prediction of five brokers stands at 39,640, approximately 1.8% higher than Tuesday’s closing level, according to Bloomberg-compiled data. Kohei Onishi, a senior investment strategy researcher at Mitsubishi UFJ Morgan Stanley Securities Co., suggested that June buybacks could further boost Japan’s stock market, as companies often purchase shares before AGMs to inflate the stock price.

Japanese Companies Become Largest Buyer of Equities

With the surge in buybacks, Japanese companies have emerged as the largest buyer of the country's equities, as per data from Daiwa Securities. The Bank of Japan, previously the top buyer via exchange-traded funds, halted such purchases in March. Seiichi Suzuki, chief equity market analyst at Tokai Tokyo Intelligence Laboratory, noted that it is currently profitable for sellers to offload cross-held shares. Companies are likely to use the funds obtained from selling these shares to repurchase their own stocks.

Short-Lived Benefits of Buybacks

However, the advantages of buybacks may be fleeting. Suzuki warned that after AGMs, the selling of cross-held shares tends to rise, while ETF managers may sell off holdings to pay investors dividends in July. Despite this, historical data from the Japan Exchange Group shows significant share buying by companies from the second week of May to mid-June over the past five years. This trend may have contributed to the 7.4% increase in the Topix last June, although the pattern is not consistent. This year, the market impact could be larger due to the pullback in April. Onishi stated that companies usually refrain from buying back shares when prices are rising. Therefore, the slowdown since April may incentivize company managers to execute buybacks ahead of AGMs.

Thoughts on the Matter

The record-breaking buybacks in Japan's stock market demonstrate the strategic moves companies are making to bolster their stock prices. However, the potential short-lived nature of these benefits raises questions about the long-term impact of such strategies. What are your thoughts on this matter? Feel free to share this article with your friends and engage in a discussion. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.