Tags: Japan | Stock | Inflows | Foreigners

Japan Stock Inflows Reverse as Foreigners Grow Skeptical

Wednesday, 19 March 2014 05:59 PM

A torrent of foreign capital into Japanese shares, the driving force behind last year's surge, has reversed, as impatience with "Abenomics" made Tokyo one of the worst-performing markets since the start of 2014.

The first two arrows in Prime Minister Shinzo Abe's policy quiver — huge government spending and unprecedented monetary easing — drove the Tokyo market up 57 percent in 2013.

But foreign investors are growing tired of waiting for the third arrow, structural reform for long-term growth. Some also fear he has become preoccupied with a nationalist agenda that risks upsetting major trading partners, China and South Korea.

"If Prime Minister Abe doesn't act quickly, he is going to waste what has been an exceptional opportunity to make a significant change," said Robert Taylor, partner and portfolio manager at Harris Associates in Chicago. "I feel like every day that goes by, the window is closing for him to move towards structural reforms."

Foreign investors have sold a net 900 billion yen ($8.9 billion) more of Japanese stocks so far this year, reversing from 2013 when they bought a record 15.1 trillion yen, data from the Japanese stock exchanges show.

With overseas investors controlling about 70 percent of market volume, according to the Tokyo Stock Exchange, the benchmark Nikkei average has fallen 12 percent this year, outpacing a 2 percent decline in ex-Japan Asian shares and compared with a 1 percent gain in the S&P 500 index.

Longer-term, "real money" foreign investors still have big investments in Japanese stocks, but some hedge funds and other agile players may have pulled out, at least for now.

On top of selling in the cash market, foreign investors have sold a net 900 billion yen of futures contracts on the Nikkei and other indexes so far this year, just erasing last year's net purchases. Speculators such as global macro funds aggressively use the futures markets, traders say.


In another sign of falling interest, trade volume in Topix, based on a 20-day rolling average, has fallen near levels seen before Abe took office, and less than half the May-June peak.

The cold shoulder from overseas forced Japan Display Inc. to cut the portion of Wednesday's initial public offering reserved for foreigners to 37.5 percent from 45 percent in the year's biggest Japanese listing. The stock plunged 15 percent in its first day of trading.

It is too early to call the end of investors' Abenomics fever. Profit-taking is normal after a big run-up, especially with global worries like the U.S. Federal Reserve curtailing its stimulus, China's slowdown and Russia's seizure of Crimea.

But there is a sense that the easy gains in Japan have already been made, and investors see pitfalls ahead, such as worries of a slowdown for the world's third-biggest economy as exports sputter despite a weak yen and Abe prepares to raise the national sales tax on April 1.

Just when Japan needs strong exports to offset the expected drag on consumption from the tax hike, shipments abroad are losing momentum. Exports fell 0.2 percent by volume last year, getting little help from an 18 percent drop by the yen against the dollar — one of the more tangible effects of Abenomics.

This month, the Bank of Japan downgraded its assessment on exports.

Foreign investors "took some money off the table. They have so much profits to take — better safe than sorry," said Olivier d'Assier, managing director of Axioma, U.S.-based financial risk management consultancy firm, whose clients include major pension funds, hedge funds and brokers around the world.

While many foreign investors are staying in the market, their strategy is subtly shifting, as they rotate out of last year's winners, such as consumer discretionary stocks and industrials, to defensive stocks, d'Assier said. "Investors are pulling back bets on economic growth," he added. "For me, that is a warning flag. They are hoping for the best while preparing for the worst."


Foreign investors' buying is needed if Japanese shares are to recoup their 13 percent fall from the end-December six-year high, much less make further gains.

Japanese investors remain cautious after more than a decade of poor performance and deflation. Domestic institutional investors are also shunning risk because of regulatory reasons such as Basel III for banks and solvency ratio for insurers.

Bank of Japan board member Takehiro Sato said last month that foreign investors appear disappointed by Abe's lack of reforms.

A big risk for the market is that Abe, who has unveiled two versions of his "growth strategy," will similarly fail to wow investors with the next instalment, promised for June. Investors want to see structural reforms ranging from deregulating a rigid labor market, to corporate tax cuts, and participation in the Trans-Pacific Partnership, a Pacific-wide trade deal of 12 countries, which could force Japan to drop some barriers to in place to protect farmers.

Abe's popularity gives him political capital needed to push through politically difficult decisions, investors say, but many fear he may be squandering his opportunity, especially with his increasing focus on military and nationalist issues. Abe visited a shrine to Japan's war dead in December, sparking anger from China and South Korea, who saw it as a glorification of Japan's wartime and colonial past.

"Most investors are concerned about Abe's nationalist agenda and, for that matter, the potential conflict with its neighbor and most important trade partner, China," said Michael Kretschmer, senior portfolio manager at Pelargos Capital in the Hague in the Netherlands.

"The economic impact of the increased tensions is for real, and investors will and should apply a discount to stocks that are heavily exposed to China, not only from the demand side but also production side."

China is Japan's largest trade partner. Over 22,000 Japanese companies are in China, from Toyota Motor Corp to small software developers, many using China as a production base. Japan's exports fell in 2012, when a territorial dispute between the two countries led to anti-Japan protests in China and China-bound exports dropped more than 10 percent.

Abe's focus on conservative issues dear to his political base does not necessarily mean he will neglect the economy. "If you have a revision of the self-defence guidelines, does that mean that you cannot have a corporate tax cut? It makes no sense," said Jesper Koll, head of Japanese equity research at J.P.Morgan.

© 2019 Thomson/Reuters. All rights reserved.

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A torrent of foreign capital into Japanese shares, the driving force behind last year's surge, has reversed, as impatience with "Abenomics" made Tokyo one of the worst-performing markets since the start of 2014.
Wednesday, 19 March 2014 05:59 PM
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