Japan’s Stock Market Rally Fades as Foreign Investors Sell Off in Sluggish Economy
The record-breaking rally in Japan’s share market earlier this year seems like a distant memory as foreign investors are now selling off stocks in a sluggish economy. Citigroup Inc. and abrdn Plc are among the banks that have turned more pessimistic toward the nation’s equities as the outlook for corporate governance reform and the Bank of Japan’s monetary policy remains uncertain.
A fund manager survey by Bank of America Corp. showed that about a third of respondents believe the market has peaked. Foreign investors, who helped push up Japanese shares to a record high just a few months ago, have become net sellers for a fourth straight week through June 14, marking the longest streak since September, according to Tokyo Stock Exchange data.
Japan’s blue-chip Nikkei 225 index has stalled since reaching an all-time high on March 22, dropping 5.6% since then. This is in stark contrast to the 1% gain in the MSCI AC Asia Pacific Index and the 4.4% advance in the US’s surging S&P 500 Index during the same period.
“The early optimism for Japanese stocks this year is clearly hitting a speed bump,” said Hebe Chen, an analyst at IG Markets Ltd. “Investors face the soul-searching question of whether the drivers for Japanese stocks are sustainable.”
Factors that supported Japanese shares earlier are now starting to drag on the market. Foreign investors, attracted by Japan’s push to improve shareholder value, are now selling off Japanese stocks, unloading a net ¥250 billion ($1.6 billion) worth of stocks in the week ended June 14, according to TSE data.
Japanese equities are facing “a material risk of correction,” according to Citigroup analysts, and it may take a while before positive factors emerge. Investors are also becoming wary of the yen’s relentless slide, which could harm Japan’s economy by boosting inflationary pressure.
Despite the recent sluggishness in shares, several strategists remain positive on Japan’s long-term outlook, citing structural changes including corporate reforms, domestic investments, and wage growth. Investors will be closely watching whether the Bank of Japan pushes ahead with its second interest-rate hike in July after lifting rates for the first time since 2007 in March.
Edinburgh-based abrdn Plc prefers Chinese and Indian stocks over their Japanese peers in the next three to six months, citing the right policy moves that would help the two emerging markets attract fund inflows. As for Japan, foreign investors will likely need to see more progress on corporate governance reform before adding much there.
