TSE Cash Markets

Global investors are piling into Japan, fueling the country’s equity market this year amid a weaker yen and dampened prospects of the central bank’s exit from its negative interest rate policy.

“A lot of foreign investors driving the rally have previously not been invested in Japan,” said Zuhair Khan, senior fund manager at Union Bancaire Privee who has been in the Japanese financial services industry for around three decades.

After a strong comeback last year, the Japanese equity market is where “every investor now wants to be in,” he said, adding that a considerable chunk of foreign investors have rotated their investments out of China and the U.S.

Foreign investors purchased a net 955.7 billion yen ($6.46 billion) of Japanese stocks between Jan. 9 and Jan. 12, the largest amount since June, according to Tokyo Stock Exchange data. They purchased 140.5 billion yen during the previous week, which covered two trading days due to the New Year holiday.

Companies, excluding financial institutions, purchased a net 131.2 billion yen in the second week of the month. Retail investors sold off 1.06 trillion yen, marking their fifth straight week of net sales.

“The fact that the scale of the purchases of stocks was larger than futures, which tend to be more short-term in nature, suggests that foreign investors with a mid- to long-term strategy were behind the capital inflows,” said Chizuru Morishita, a researcher at NLI Research Institute.
The bellwether Nikkei Stock Average and Tokyo Stock Price Index rose 7.5% and 6.1%, respectively in the year to Friday, while the S&P 500 just rose 2.0% and the STOXX Europe 600 slid 1.9%.

Commodity trading advisors look to have purchased a net 700 billion yen of Japanese equities in the week the Nikkei Stock Average hit a fresh 33-year high, according to Yoshitaka Suda, quantitative strategist at Nomura Securities.
Commodity trading advisors refer to systematic, trend-following money managers who make various investments in the futures market.

Commodity trading advisors, which include overseas investors, likely concentrated their investments on Nikkei Stock Average futures given their preference for them over Tokyo Stock Price Index futures, he said.

“A partial reason behind the recent rally is definitely commodity trading advisors,” he said.

Commodity trading advisors are expected to buy 800 billion yen worth of Japanese equities over the next two weeks even if Japanese markets stay flat, according to Suda‘s calculations.

“When the Nikkei 225 surpassed 34,000, it was a clear signal for them to expand long positions in the Nikkei,” he said.

Global investor interest in Japan took off around March when China‘s economic rebound from the COVID pandemic disappointed. Positive changes in Japan‘s macroeconomic environment and corporate governance reforms also began garnering attention, including from American investor Warren Buffett.

But “foreign investors did not build much in terms of actual positions in the second half of 2023 and their fund flows into Japanese stocks were not evident,” Goldman Sachs Japan equity strategists wrote in a report last week.

This time, “global investors seem to have ramped up their purchase of Japanese equities again” as investment conditions have changed, the report said.

The Japanese currency has weakened in a reversal from the end of last year, and investor expectations of the Bank of Japan pivoting early away from the negative interest rate policy have receded following the Noto Peninsula earthquake on New Year‘s Day.

Many global investors new to Japan are using low-cost passive investments linked to the Nikkei Stock Average and Tokyo Stock Price Index as a starting point while they study the market, experts said.

The Shanghai Stock Exchange temporarily suspended trading of China AMC’s Nomura Nikkei 225 ETF, which tracks the Nikkei Stock Average, on Wednesday after the fund traded at a 9.5% premium over the underlying net assets the prior day.

“If you don’t know the market well, what do you do? You invest in the most liquid, large-cap names, whether it be the Nikkei 225 or Topix,” Khan of Union Bancaire Privee said.

There were continued signs of large-cap crowding in the first week of the month, according to a report by Goldman Sachs Japan equity strategists.

The report noted Fast Retailing, the operator of Japanese retailer Uniqlo, climbed 13% from the previous week.

Sectors with higher price-to-book ratios led the market higher, with factory automation gaining 10% and gaming up 8% in the cited period, the report said.

“The constituents of these indices tend to be higher growth, higher PBR [price-to-book ratio] foreign favorite blue chips,” the report said.

Sectors with lower price-to-book ratios lagged as shippers fell 4%, mega banks stayed flat and utilities and energy both rose 1%.

Some like Kei Okamura, senior vice president of Neuberger Berman, expect “more momentum build up” for the middle market as the Tokyo Stock Exchange tries to boost the capital efficiency of listed companies.

He added the new tax-saving investment scheme Nippon Individual Savings Account (NISA), which took effect on Jan. 1, is a “slow-burning catalyst” for the Japanese equity market.

NISA is aimed at shifting 2,100 trillion yen of Japanese household assets — more than half held in cash — into investments.

Under the new NISA, individual investors are estimated to buy 1.6 trillion yen of Japanese equities per year, up 23% from the 1.3 trillion yen under the old tax exemption scheme, according to Masatoshi Kikuchi, chief equity strategist at Mizuho Securities.

For now, the new NISA “has done little to boost investment in Japanese equities” in the short period since introduction largely because Japanese investors prefer global equities, said Suda of Nomura Securities.

In the near term, there is a risk of consolidation in the Japanese market but it is still an “attractive investment theme with strong potential gains,” said Shrikant Kale, senior quant strategist at Jefferies in Hong Kong.

While foreign investors have been the buyers of the recent market rally, the new NISA and last year‘s strong gains could encourage retail investors to invest more in Japan, he said.