Topix's valuation masks falling profits in Japan

TOKYO: The steepest rally in the Topix index in 56 years has turned Japanese stocks into the world's most expensive equities. Not for long, say hedge-fund managers betting the recession will prevent earnings from rebounding.

Bridgewater Associates Inc, Highbridge Capital Management LLC and Farallon Capital Management LLC, which together oversee almost $80 billion, increased bets against Japanese companies in the past three months, filings to the Tokyo Stock Exchange show. The Topix climbed 28 percent in the same period, the most since 1953, and shares in the index trade at an average 42 times estimated earnings, the highest level among the 40 largest markets, data compiled by Bloomberg show.

Bullish investors say Japanese stocks, which have recovered 41 percent of the losses that followed the collapse of Lehman Brothers Holdings Inc in September, will rise further because analysts predict earnings will rebound the most since 2000. Bears point to forecasts by economists that show Japan will contract twice as much as the US this year.