Japan Default Risks Signal Stocks Are a ‘Sell’: Chart of Day

By Satoshi Kawano

Dec. 9 (Bloomberg) -- The link between corporate default risk and stock prices indicates Japanese shares trading at record low valuations may have room to fall further, according to Hiroshi Fujimoto, of Shinkin Asset Management Co.

The CHART OF THE DAY shows the inverse relationship on a 120-day basis between the Topix index and the iTraxx Japan Index benchmark of credit-default swap spreads, which measures perceived default risk. On Dec. 5, the correlation coefficient reached minus 0.75 on a scale of plus 1 to minus 1. A positive reading shows moves in the same direction and a negative number indicates moves in opposite directions.

“The CDS index is at its highest since its creation, indicating a deterioration of corporate financial conditions,” said Fujimoto, who helps manage $5.7 billion in assets. “We are reducing our holdings of Japanese stocks.”

Prior to the financial crisis, which erupted in mid-2007 with the collapse of two Bear Stearns Cos. hedge funds, changes in the two indexes were unconnected, the chart shows. The correlation grew as the credit crisis started to drag on global economic growth and bankruptcies by listed Japanese companies climbed to a record.

“Under current conditions, when credit concerns are high, the most effective gauge for risk is the CDS index,” said Hiroyasu Ito, a Tokyo-based fund manager at Dai-Ichi Mutual Life Insurance Co. “When bad news from home and abroad causes the CDS index to rise sharply, we interpret it as a signal to sell shares.”

The Topix index, which comprises 1,709 constituents, has fallen 45 percent this year. Japan’s economy, the world’s second largest, entered its first recession since 2001 last quarter, which may last through 2010, according to economists surveyed by Bloomberg.

For Related News:

To contact the reporter for this story: Satoshi Kawano in Tokyo at Skawano1@bloomberg.net.