Short sellers target Japanese retail

Japan’s economic tightening has put consumers under increased strain with added inflation and higher taxes; this has not gone unnoticed by short sellers who have increased their positions in the country’s retailers.

• Short interest across Japanese retailers has increased 9% in the last year
• Speciality stores are the most shorted, led by Hello Kitty creator Sanrio
• However, electronics retailers have seen significant short covering

Japanese consumers have the right to feel blue. The country’s consumers have been hit by the conflicting pressures of a depreciating currency and the first sales tax increase in over 15 years.

These developments have seen consumers feel increasingly gloomy, with the latest poll of Japanese consumer confidence reporting the lowest reading since 2011. The latest 37.5 reading is down from a recent high of 45.7 a year ago when Prime Minister Abe’s policies were enjoying their moment in the sun. Faced with the erosion of the consumers’ purchasing power, Japanese retailers have seen shorts circle in.

Short interest surging

The recent gloomy consumer confidence has seen demand to borrow shares in the 119 Japanese retailers with a market cap greater than $100m jump by 9% in the last 12 months. Currently, Japanese retailers have an average 1.25% of their shares out on loan; in line with country’s Nikkei 225 index where the same number stands at 1.2% of shares.

Interestingly, the demand to borrow shares in the country’s retailers has trailed off from the highs in recent weeks as the sales tax increase actually provided a something of a boon for retailers. Consumers were eager to escape the rise in sales tax, and brought many of their purchases forward which helped retailers over the first quarter of the year. The demand to borrow shares will definitely be something to watch in the coming months as consumers adjust to the new normal.

Speciality retail targeted

Of the retailers currently targeted by short sellers, we see speciality firms with the greatest average demand to borrow. Speciality firms now have 2.5% of shares out on loan on average; over twice the demand to borrow a year ago. These retailers offer the type of items that are the first to drop off the shopping list when consumers reign in spending.

One of the companies seeing the largest amount of short interest is Hello Kitty creator Sanrio, which has seen shorts triple in the last 12 months to an all-time high. Sanrio shares are down by a quarter since the start of the year after the company’s earnings failed to live up to analyst expectations.

Also seeing heavy short interest in the speciality retail space is eyewear retailer Jin Co and entertainment retailer GEO Holding.

Large ticket retailers see covering

Retailers which specialise in large ticket discretionary items such as home improvement, cars and electronics have seen shorts cover over the last 12 months.

Electronics retailers have seen the largest bout of short covering with average demand to borrow falling by a third to 1.6% of shares outstanding. These firms used to be the most shorted subsector. Heavy covering in the likes of Edion Corporation and K’s Holding has seen the sector become the fifth most shorted subsector behind department stores and catalogue retailers.