Japanese stocks are having a banner year, with foreign investors flooding into the market. Local investors were less enthusiastic. Domestic investors have sold about 53 billion yen (about $340 million) of TSE Prime index companies between February and mid-May, according to data from Japan Exchange Group. Meanwhile, foreign investors bought 270 billion yen (about $1.7 billion) in stocks during the period. EPFR data shows that between January and mid-April, assets of overseas-registered Japanese equity funds also grew by US$7.5 billion, while assets flowing into domestic equity funds were US$4.1 billion. The latest wave of selling comes as the Nikkei 225 index retreats from record levels set in March. The benchmark has fallen 4.3% so far this quarter but will still rise 15% in 2024. . .N225 Nikkei peaks so far in 2024 Japanese stocks have taken a breather in recent weeks as geopolitical tensions in the Middle East and weakness in semiconductor stocks, which drove the Nikkei’s gains, have helped. Goldman Sachs pointed out that continued inflation in the United States is also putting pressure on Japanese stocks. “The broader deflation narrative remains intact, but risk sentiment is unlikely to return quickly unless markets become more convinced that deflation is simply being delayed and inflation will not reaccelerate,” the bank wrote in late April. “While the risk-reward “Uncertainty is higher than previously assumed, but we maintain our constructive stance on Japanese equities.” Japanese investors have long been hesitant about local equities since the asset price bubble burst in the early 1990s. Skepticism. More than half of the country’s household assets are held in deposits, compared with 14% in the United States, according to Morgan Stanley. Local investors have also historically preferred U.S. and other foreign stocks to Japanese stocks. Another reason why Japanese investors are less enthusiastic about their domestic market may be the sharp depreciation of the yen. After years of negative interest rates, the Bank of Japan took steps in 2024 to normalize monetary policy, including raising interest rates from -0.1% to zero to 0.1% in March. However, this is in sharp contrast to the U.S. Federal Reserve’s interest rate policy, which remains between 5.25% and 5.5%. The spread triggered a sell-off in the yen, which is near its lowest level against the dollar in more than three decades. While a weaker yen benefits some corners of the Japanese market — it helps large exporters who sell their products in the form of a stronger dollar — it can be a double-edged sword as it weakens those who trade in the local currency. The purchasing power of individuals and companies. This is also enough to make older investors more willing to cash in their profits. According to population data from the Ministry of Internal Affairs and Communications, nearly one-third of the population will be 65 or older as of 2023. Older investors tend to be more risk averse. Many of the country’s older investors are also less enthusiastic about stocks after seeing the country’s stock market struggle for more than three decades and experience periods of economic stagflation. However, younger generations who were not traumatized by the stock market bubble are gradually accepting this trend. Nearly a quarter of 20-somethings will be invested in mutual funds by 2023, nearly four times the number in 2016, according to research from the Investment Trust Association. Prime Minister Fumio Kishida’s government has also revised the terms of the Japanese Personal Savings Account (NISA), Japan’s tax-free stock investment scheme, to stimulate investment rather than cash. However, “younger generations… may not have quite the same capital as older generations and so may still not be enough to drive growth,” said Julian McManus, portfolio manager at Janus Henderson (Julian McManus) said. There are also concerns that more funds from the NISA reforms may also flow to the United States and other overseas markets than to the domestic market. Bernstein pointed out that nearly 60% of Japan’s domestic equity funds will flow into U.S. and Indian stocks in 2023. Outlook for Japanese stocks remains strong Many global investors remain bullish on Japanese stocks despite a recent round of selling by local investors and the market’s recent troubles. One of the factors boosting the prospects of these companies is the corporate governance reforms implemented by the government. Zachary Hill, head of portfolio management at Horizon Investments, said it was a “slow but significant push” for Japanese stocks to have more room to run. As the Federal Reserve begins to cut interest rates, a possible rebound in the yen will also boost Japanese stocks. Overall, the lag in the domestic market rebound “does not have a material impact on our outlook for Japan,” said Raymond Chan, chief investment officer for Asia Pacific at Allianz Global Investors. “We remain optimistic about the outlook,” Chen said. “We are seeing improvements in corporate earnings and valuations, which we believe does not underestimate the fundamental changes brought about by governance reforms and shareholder value enhancement.” McManus noted , although it is unusual for stocks to fall as the yen weakens, he remains optimistic about opportunities in the Japanese market. “To the extent that the yen continues to be weak right now, it will continue to strengthen, but that’s not really the key to where we invest in most Japanese assets.” Another vote of confidence in the Japanese market came from Warren Buffett. Last year, he increased his holdings in five Japanese trading companies – Mitsubishi, Mitsui, Itochu, Marubeni and Sumitomo.
