Buy Japan Banks on Policy Action, Nikko Citi Says

By Patrick Rial

Jan. 30 (Bloomberg) -- Investors in Japan should buy shares of banks and heavily indebted companies who will benefit from government efforts to ease financial gridlock, according to Nikko Citigroup Ltd.

Sumitomo Mitsui Financial Group Inc., Japan’s second- largest bank by market value, stands to gain from credit guarantees for smaller companies, which reduce non-performing loan risks, Tsutomu Fujita, chief equity strategist at Nikko Citigroup, wrote in a Jan. 29 report. Softbank Corp. and IHI Corp. are possible beneficiaries of government-backed equity purchases for companies struggling to raise funds.

“We thus expect the government to put into action a quick- fire succession of economic policies and stimulus measures,” Fujita wrote. “We recommend a strategy of increasing portfolio weightings of stocks that are likely to benefit from these economic policies and stimuli.”

With many shares trading at discounts to book value, investors can also profit by buying stocks that are potentially attractive acquisition targets, Fujita wrote. These include Marui Group Co. in the department store industry and TV Asahi Corp. in broadcasting.

Fujita added he expects the overall market to start rising around April as investors begin to look forward to a recovery in the global economy in 2010. Japan’s Nikkei 225 Stock Average posted a record 42 percent drop last year and has retreated another 10 percent in the first month of 2009.

Japan’s parliament passed a 4.8 trillion yen ($53.7 billion) stimulus measure this week and policy makers including Prime Minister Taro Aso have vowed to take the necessary steps to revive the nation’s health amid a recession.

Loans, Mergers

The government may extend guarantees for loans to small companies to 20 trillion yen from the current 6 trillion yen, which would boost the profitability of banks, Fujita said. Additionally, buyers can get tax benefits on home purchases, which is likely to increase mortgage loans, the strategist wrote.

Japanese companies’ tendency to conduct mergers during recessions indicates that the market is entering a period of increased activity where companies with low price-to-book values could become targets, according to Fujita.

Seven & I Holdings Co. said today it will merge three of its department store subsidiaries. Clothing chain Fast Retailing Co. made a tender offer for its affiliate Link Theory Holdings Co. on Jan. 28, while sushi chain Atom Corp. said today it will acquire steakhouse Zict Inc.

“M&A in Japan tends to be characterized by an increase in deals aimed at industry realignment and deals designed to rescue troubled companies during periods of economic downturn, followed by a sharp rally in profitability when the economy subsequently recovers,” Fujita wrote.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.