OREANDA-NEWS. Japan’s industrial production fell more than estimated in February, adding to pressure from lower consumer spending and faltering inflation. Output declined 3.4% month-on-month, according to data from the trade ministry. The median estimate of 28 economists surveyed by Bloomberg was for a decline of 1.9%.

The data is the weakest since June last year and underscores the fragility of Japan’s recovery from a recession last year. Holidays in many parts of Asia that took place in February also curbed exports during the month, further reducing production, according to economists at Mizuho Securities.

Other Asian countries are also suffering from weak exports as the US recovery remains patchy and Eurozone growth stays tepid.

Japanese consumer prices were also flat from a year earlier in February, deepening worries the country is losing the battle against deflation two years after its central bank launched a radical economic-revival programme.

February core consumer-price index touched 0%, the lowest level since May 2013, and far from the 2% target that the central bank had pledged to hit by this spring. The index excludes fresh food prices and effects of a tax increase. The main reason for the price weakness is a drop in global oil prices, something beyond the central bank’s control.

Most BOJ watchers expect the central bank to expand its stimulus programme this year to push ahead with the fight against deflation. Yet even as the BOJ is tilting towards further easing, the government is inching towards another sales tax hike.

Weak Yen Boosts Profits but Exports Remain Lacklustre

Aided by the weaker yen, Japan Incorporated reported record earnings as well as hefty dividends. Screen Holdings announced it would lift its year-

end dividend from the previously planned 5 yen per share to 7 yen. Yahoo Japan also doubled its year-end dividend.

The effects of increasing dividend returns can be seen from the index below. The Total Returns Gross Dividend Index has outperformed the Nikkei Index as dividend returns reinvested are factored in.

Nikkei Dividend Index reached all-time high in 2014

With a jump in dividend payments by corporate Japan in 2014, a new record was recently established in the final settlement price of the SGX Nikkei Stock Average Dividend Point Index futures. This means that the price of the Nikkei Dividend futures gained 16.9% over 15 months. The final value of the Nikkei Stock Average Dividend Point Index for 2014 stood at 265.12, up 38.39 points from 2013, Nikkei announced last Wednesday.

This was the fifth consecutive annual increase for the index and its second all-time high in a row.

The Nikkei Stock Average Dividend Point Index is based on the dividends an investor would receive for holding a share of every Nikkei 225 constituent company for a calendar year. The final value of the 2014 index was determined after all of 2014 dividends were fixed at the end of March. Among the 2014 constituents that are possible to compare to the previous year, 111 increased their dividend payments, while 24 decreased them.

The SGX Nikkei Stock Average Dividend Point Index futures allow investors to customise their exposure to dividends. Investors can strip out of the projected dividend stream to maximize exposure to share price appreciation; alternatively the Dividend Index futures also enable pure dividend exposure.

However, the largesse enjoyed by companies did little to help boost Japan’s exports.

Despite the initial boost by the weak currency, Japan’s export growth continued to disappoint due to the anaemic global economy. In addition, many Japanese corporations had outsourced their production offshore, which limited export gains from the weaker yen.

On the other hand, the weak yen allowed Japanese corporations to report higher profits and dividends. The Nikkei 225 Index as illustrated in the chart below has soared since the implementation of Abenomics – the index is currently the second-best performing equity index in the current year.

Nonetheless, the boost in profits was accomplished without a substantial improvement in the economy. Since 1994, the Nikkei Index has had a number of dead-cat bounces, and with the Index nearing the highs of the 2000s, questions on the sustainability of the bull run remain.

Japan’s Public Funds Join the Fray

Japan’s Government Pension Investment Fund (GPIF) bought some 2.6 trillion yen in Japanese shares in the April-December period, accelerating purchases after a surprise decision in October to raise its domestic stock allocation to 25% from 12%.

Total purchases for the whole fiscal 2014 likely topped 3 trillion yen, overtaking the 2.7 trillion yen from fiscal 2008, when the GPIF stepped up purchases amid low stock prices.

Elsewhere, the Bank of Japan (BOJ) and other public pension funds also played an increasingly important role in supporting the market. The central bank bought 1.7 trillion yen in exchange-traded funds in fiscal 2014, up 30% from the previous fiscal year. It has tripled purchases since the end of October.

Going forward, BOJ is expected to buy around 3 trillion yen of ETFs a year as part of its monetary easing programme, which will continue to provide support to the market. Japan Post Bank Holdings, which plans to go public this fall, also plans to boost its stock portfolio. The company will raise its banking unit's investments in risk assets, such as foreign bonds and stocks by 30% to 60 trillion yen (US\$496 billion) in fiscal 2017. 

In conjunction with the resurgent interest in Japanese equities, volume and open interest of the SGX Nikkei 225 futures have soared.

More than 60% of the expiring SGX Nikkei 225 Futures March contracts were rolled into June contracts and longer-dated maturities.

Bid-offer spread of the SGX Nikkei 225 futures contract is lower than 2 basis points during the roll period. This gives investors more precision in capturing the fair value of the futures contract within the rolling process.Source: Singapore Exchange