Japan Stocks Rally From 2-Decade Low on Valuations; Banks Slide

By Patrick Rial and Tomoko Yamazaki

Oct. 28 (Bloomberg) -- Japanese stocks rose the most in two weeks, breaking a four-day losing streak that erased almost a quarter of the Nikkei 225 Stock Average's value and sent the gauge to a 26-year low.

Investors snapped up shares trading at historic lows, with Nippon Steel Corp., Japan's biggest maker of the alloy, and Isuzu Motors Ltd. climbing at least 20 percent after both stocks traded at less than 6 times trailing earnings. Honda Motor Corp., which had plunged 26 percent in four days, jumped 14 percent. Nidec Corp., the world's biggest maker of motors for disk drives, rose 14 percent after profit jumped 37 percent in the first half.

``Eventually the sun will shine and some investors will be smiling again,'' said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, whose parent company manages about $3.1 billion. ``Panic also means opportunities.''

The Nikkei 225, which lost 23 percent in the previous four days, gained 459.02, or 6.4 percent, to close at 7,621.92 in Tokyo. The gauge dropped to the lowest since October 1982 yesterday and fell as much as 2.4 percent today, sending it briefly below 7,000. The broader Topix index added 37.57, or 5 percent, to 784.03. Both gauges rose the most since Oct. 14.

Stocks also advanced as new restrictions on short-selling boosted confidence share prices don't have much room left to fall. The volume of trading on the main board of the Tokyo exchange was the highest this year, excluding futures settlement sessions where turnover picks up.

Book Values

The Nikkei has lost 50 percent this year and is set for its worst-ever annual performance as the financial crisis sparked a downturn in the global economy. Shares on the Topix fell to 0.83 times book value yesterday, a record low.

Nippon Steel soared 20 percent to 306 yen. The company, which is still down 56 percent on the year, will invest in South Korean rival Posco's steel mill in Vietnam, the latter company said today. JFE Holdings Inc., Japan's No. 2 steelmaker, gained 16 percent to 2,265. The company boosted its full-year forecast last week and said it plans to buy back 9 percent of its shares.

Isuzu, Japan's third-biggest maker of commercial vehicles, gained 21 percent to 150 yen, paring this year's loss to 70 percent.

``Stocks have fallen to the extent they're fully reflecting a worsening economy and the dimming outlook for company earnings,'' said Yoshihiro Ito, a senior strategist at Tokyo- based Okasan Asset Management Co., which oversees about $9.3 billion. ``Shares are very cheap relative to book values and earnings.''

Short Sales

Finance Minister Shoichi Nakagawa said a temporary ban on so-called naked short sales would take effect today instead of a planned start on Nov. 4. The Financial Services Agency announced yesterday investors with short-sale positions of more than 0.25 percent of the outstanding shares of a stock must report their position to brokerages.

Nidec soared 490 yen to 4,040 yen, the most in 15 months, after posting a record first-half profit. The company boosted growth through acquisitions in recent years and lifted net income for the six months ended Sept. 30 by 37 percent.

Kao Corp., Japan's largest maker of household and personal care products, advanced 8.3 percent to 2,940 yen after the company reported an 11 percent gain in first-half net income.

Banks dragged Japanese shares lower most of the morning session after Mitsubishi UFJ Financial Group Inc. said it would sell new shares to replenish capital. Its shares dropped 5.5 percent to 551 yen, paring an earlier plunge of 16 percent.

Mizuho Financial Group Inc., the country's second-biggest listed bank, sank 6.6 percent to 214,900 yen. Sumitomo Mitsui Financial Group Inc., the third biggest, lost 13 percent to 335,000 yen.

Financing Squeeze

Mitsubishi Estate Co., Japan's second-biggest developer, led property shares lower on concern project financing will dry up as banks struggle to rebuild capital. Its stock declined 12 percent to 1,500 yen, the lowest since October 2005. Sumitomo Realty & Development Co. tumbled 12 percent to 1,419 yen. The Topix Real Estate Index lost 11 percent, the worst performer among the benchmark's 33 groups and its biggest slide since May 2004.

Banks have cut lending to developers amid the global financial crisis, forcing Urban Corp. and 16 other listed property-related companies into bankruptcy this year. Minoru Mori, chairman of Mori Building Co., Japan's biggest privately held developer, said yesterday residential property prices are headed for a ``full-blown'' drop.

``The problem is, as cheap as shares are, some funds are being forced to sell because of redemptions,'' said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center in Tokyo. ``Until they stop unloading shares, there won't be a true rebound.''

To contact the reporters for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net.