HONG KONG (Reuters) – With Japan’s stock market climbing to a multi-decade high, big investors with long memories say they are staying out, fearful of waning momentum and the possibility of the central bank scrapping massive monetary stimulus.
Riding a wave of buybacks and strong corporate earnings, spurred by a weaker yen, the broad Topix index (. days) rose near similar highs.
However, for many, the milestones are a reminder that Japanese stocks have skewed for years, making many foreign asset distributors reluctant to enter the market. Some say the caution is only heightened by the risky political course ahead.
The research arm of BlackRock, the world’s largest asset manager, recommends assigning “less weight” to Japan and waits for policy uncertainty to clear, according to Ben Powell, senior investment analyst for Asia Pacific at the BlackRock Investment Institute.
“I think there’s a potential marine change,” he said, as some money is flowing in and there appears to be momentum building behind a governance push that unlocks value from balance sheets through buybacks and other concessions to shareholders.
“But I’m old enough to remember the excitement of Abe introducing the ‘three arrows’,” he said, referring to former Prime Minister Shinzo Abe’s economic reforms a decade ago aimed at reviving growth.
“It was followed by a very large outpouring of global investors, but then, unfortunately, much of the enthusiasm was dissipated,” Powell said. He said more certainty in policy would allow a better focus on local drivers.
For nearly two decades, Japan has pushed deeper into uncharted territory with its monetary policy to try to revive growth after the asset bubble burst in the 1990s — cutting interest rates to zero in 1999, even lower in 2016, and stabilizing bond yields.
Now that inflation and growth are finally here, the pressure is on the Bank of Japan’s new governor to chart a course back to normalcy. He has not revealed his hand yet and uncertainty appears to be hindering the next rally in investment and currency, and could prevent stocks from further gains.
Swiss wealth manager Union Bancaire Privée is also underweighting Japan, with policy forecasts exposing currency risk. UBS’s chief investment desk is neutral and favors China where a global slowdown looms.
Big money awaits
The policy and communications challenge for the Bank of Japan’s new governor, Kazuo Ueda, is a tough one. He has begun laying the groundwork for the turnaround by saying the bank will discuss an exit strategy on its policies once inflation looks stable.
While he believes it is too early to discuss the specifics, markets are already worried about the fate of the Bank of Japan’s massive asset holdings and expect the yen to quickly reverse last year’s sharp decline if its loose policy settings look like they may be fading.
“(A stronger yen) will hurt large outward-focused conglomerates who will face an unfavorable domestic exchange rate, higher domestic borrowing costs and also be exposed to global economic weakness,” said Aninda Mitra, head of investment strategy and macro in Asia at BNY. Mellon Investment Management.
Mitra is certainly more positive about banks and small businesses, and many investors — including Warren Buffet — believe stocks have a way to go higher in Japan.
Japanese stocks have outperformed all major markets this year other than the technology-focused Nasdaq, with the Nikkei (.N225) up more than 15% this year, and 11% in dollar terms, against a 7% increase for global stocks (.).
Buffett has also increased his stakes in Japanese trading houses and says he is eyeing other purchases – foreign inflows of 3.65 trillion yen ($27 billion) this year suggest other money managers are following him.
But even those inflows are still less than the 4.35 trillion yen of foreign money that left Japan during 2022 and Morningstar data shows that inflows into Japanese open-ended funds are already becoming volatile, suggesting that a sustained turnaround is still some time away.
“It’s going to be a good few years before a lot of people show significant interest,” said Simon Edelstein, UK-based director of Artemis’ Global Selection Strategy Fund.
“Big money doesn’t buy cheap, it buys momentum.”
(Corrected this story to say “policy certainty” instead of “policy uncertainty” while paraphrasing the quote in paragraph 7)
($1 = 135.0500 yen)
Reporting by Summer Zain in Hong Kong. Additional reporting by Naomi Rovnik in London and Bhaturaja Murugapupathi in Bengaluru. Written by Tom Westbrook. Editing by Sam Holmes
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