Japanese stocks are rising but these investors are selling
Japanese stocks are enjoying an exciting year as foreign investors flock to the market. Domestic investors are not as enthusiastic. Data from Japan Exchange Group shows that domestic investors sold about 53 billion yen, or about $340 million, in companies on the TSE Prime index between February and mid-May. foreign investors bought 270 billion yen, or $1.7 billion, of shares during that period. According to EPFR data, foreign-based Japanese stock funds also increased assets by $7.5 billion from January to mid-April compared with $4.1 billion flowing to domestic counterparts. The latest wave of selling comes as the Nikkei 225 index has retreated from a record hit in March. Year to date, the benchmark is down 4.3%, though still higher 15% by 2024. This also comes as the country’s economy slows and interest rates remain low compared to the US – putting pressure on the yen against the dollar. .N225 YTD Nikkei mountain 2024 Geopolitical tensions across the Middle East and weakness in semiconductor stocks, which have fueled the Nikkei index’s rally, have contributed to Japan’s stock market taking a breather in recent weeks. recent week. Persistent inflation in the US is also putting pressure on Japanese stocks, Goldman Sachs noted. “The broader deflation narrative remains intact, but risk sentiment is unlikely to recover quickly until markets become more confident that deflation is only being delayed,” the bank wrote in late April. and inflation is not accelerating again.” “While risk-reward uncertainty becomes higher than previously assumed, we maintain a constructive view on Japanese equities.” Japanese investors are hesitant Japanese investors have long been skeptical about the domestic stock market after the asset price bubble burst in the early 1990s. According to Morgan Stanley, more than half of household assets The country’s families are remittances, compared with 14% in the US. Domestic investors also have a history of favoring US and other foreign stocks over Japanese stocks. Another reason why Japanese investors may not be interested in the domestic market is because of the sharp decline in the yen. The Bank of Japan has taken steps in 2024 to normalize monetary policy after years of negative interest rates, including raising interest rates in March to a range of 0 to 0.1%, up from -0.1%. However, this is in stark contrast to the Federal Reserve’s interest rate policy in the US, which still fluctuates between 5.25% and 5.5%. This exchange rate differential has caused a wave of selling in the Japanese yen, which is trading near its lowest level in more than three decades against the US dollar. While a weaker yen benefits some corners of the Japanese market – it supports major exporters who sell products in the stronger US dollar – it can be a double-edged sword because it weakens the purchasing power of individuals and companies trading in local currency. This is enough to make older investors more willing to cash in on their profits. As of 2023, nearly a third of the population will be 65 years old or older, according to population figures from the Ministry of Internal Affairs and Communications. Older investors tend to be more risk averse. Many older investors in the country also have little interest in the domestic stock market after watching it struggle for more than three decades and experience a period of economic stagnation. However, younger generations unscathed by stock bubbles are catching on to this trend. According to research from the Investment Trust Association, nearly a quarter of people in their 20s invested in mutual funds by 2023, nearly four times more than in 2016. Prime Minister Kishida Fumio’s government also corrected changed the terms of the Nippon Individual Savings Account, or NISA, the country’s tax-free securities investment program, to promote a shift to investments instead of cash. However, “the younger generation… may not have the same amount of capital as the older generation, so it may still not be enough to make the move,” said Julian McManus, portfolio manager at Janus Henderson. There are also concerns that more cash flows from NISA reform may also reach the United States and other foreign markets than domestic markets. Bernstein noted that nearly 60% of capital flows in 2023 from Japan’s domestic equity funds flowed into US and Indian stocks. Japan’s stock outlook remains strong Despite the recent sell-off by domestic investors and recent market difficulties, many global investors remain optimistic about Japanese stocks. One factor boosting the outlook for these names is corporate governance reforms enacted by the government. According to Zachary Hill, head of portfolio management at Horizon Investments, this is a “slow but important tailwind for Japanese stocks”, with more room to run. The possibility of a rebound in the yen as the Federal Reserve begins to lower interest rates will also boost Japanese stocks. Overall, the slow domestic participation in the market recovery “does not materially impact our outlook for Japan,” said Raymond Chan, chief investment officer for Asia Pacific at Allianz Global Investor, said. “We remain optimistic about the outlook,” Chan said. “We see an improving earnings picture coupled with valuations that, in our view, do not detract from the fundamental change brought about by governance reform and enhanced shareholder value .” McManus noted that, while it is unusual for stocks to fall alongside a weaker yen, he remains optimistic about opportunities in the Japanese market. “To the extent that the current yen weakness persists, it will continue to strengthen, but is not really the bottom line of our investment cases for most Japanese holdings ours.” Another vote of confidence in the Japanese market comes from Warren Buffett. Last year, he increased his shares in five domestic trading companies – Mitsubishi, Mitsui, Itochu, Marubeni and Sumitomo.
