Foreign investors are turning their backs on Japanese stocks, marking a significant shift from just a few months ago when they helped push shares to a record high. According to Tokyo Stock Exchange data, foreign investors have been net sellers for a fourth straight week through June 14, the longest streak since September.
The once-optimistic outlook for Japanese equities has dimmed as concerns over corporate governance reform and the Bank of Japan’s monetary policy linger. Citigroup Inc. and abrdn Plc are among the firms that have grown more pessimistic towards Japan’s market, with a survey by Bank of America Corp. showing that about a third of respondents believe the market has peaked.
The Nikkei 225 index, Japan’s blue-chip benchmark, has stalled since reaching an all-time high on March 22, dropping 5.6% since then. This compares unfavorably to a 1% gain in the MSCI AC Asia Pacific Index and a 4.4% advance in the S&P 500 Index during the same period.
Factors that once supported Japanese shares, such as the push for improved shareholder value, are now working against the market. Foreign investors, who were initially attracted by Japan’s efforts to enhance shareholder value, have now become net sellers, offloading a net ¥250 billion ($1.6 billion) worth of Japanese stocks in the week ended June 14.
The weakening yen is also causing concern among investors, with the currency approaching 160 per dollar, a level not seen since April. While a weak yen has traditionally been seen as beneficial for exporters, the recent sharp drop has raised worries about its impact on Japan’s economy, including inflationary pressure.
Despite the current sluggishness in Japanese shares, some strategists remain positive on the country’s long-term outlook. Structural changes, such as corporate reforms, domestic investments, and wage growth, are cited as reasons for optimism by firms like BlackRock Inc. and Morgan Stanley.
Investors will be closely watching the Bank of Japan’s next moves, particularly regarding interest rate hikes. Expectations of a rate hike in July have waned, with swap rates indicating a lower probability of an increase. Edinburgh-based abrdn Plc is favoring Chinese and Indian stocks over Japanese stocks in the next few months, citing the potential for policy moves to attract fund inflows in those markets.
