Despite a 52% rise in the Nikkei 225 last year, global investors appear to be largely underweight Japanese stocks, argues BNY Mellon’s investment arm, citing other research. But the firm says that may change this year as investors reassess portfolios on the back of Japanese economic and political data.
Global investors will re-evaluate their current holdings and may shift from underweight to neutral Japan equities, which would drive a $200 billion inflow into the market, says Miyuki Kashima, head of Japanese equity at BNY Mellon Asset Management Japan.
Abenomics, Prime Minister Shinzo Abe’s three-pronged approach to reinvigorate the economy, has its fans and its critics. But the market consensus is that even the most cynical investor can’t deny that the first two initiatives – monetary easing and fiscal stimulus – have achieved their aims.
In addition to last year’s Nikkei rally, a weakening yen has boosted export earnings. And the country looks like it may be entering an inflationary environment, the one of the goals of Abe’s administration.
Last year, thriving stock markets attracted $150 billion in net flows into Japanese stocks in 2013, says BNY Mellon. Yet despite these substantial inflows, investors remain underweight Japanese equities.
Some will undoubtedly continue to be critical about Abenomics. Loan growth to the private sector has been decelerating as commercial banks sell government bonds to the Bank of Japan, effectively neutralising the effects of the monetary expansion, argue economists. And questions remain over the third arrow of Abenomics, structural reform.
Yet a number of factors – including rising property prices – indicate the recovery has legs, and global fund managers could this year start to increase investment into domestic equities, says Kashima.
Following the 2008/2009 financial crisis, global equity markets’ rebound occurred in tandem with an earnings recovery. This has not happened in Japan, however.
“The earthquake, the strong yen and rotating prime ministers held back Japan’s [stock market] recovery,” Kashima says. “Even after the sharp stock market rise in 2013, the Japanese equity market has not caught up with the earnings recovery seen in other global equity markets since 2008.”
Japan’s corporate earnings outlook is positive this year, says BNY Mellon, as Abe is likely to push on with changes necessary to get the country on a longer-term growth path. The firm is also confident his administration will continue his “flexible fiscal policy” to ensure recent economic and political momentum is maintained when tax reforms take effect in the second quarter.
Sceptics argue that the current strength in the economy is temporary and mainly supported by fiscal spending and the rush to buy before the consumption tax rises to 8% from 5% in April.
Yet several factors – including an improving real estate market – indicate that these views are too pessimistic, BNY Mellon argues.
Rising property prices and a marked decline in central Tokyo vacancy rates signals long-term confidence is returning to the country. And a Ministry of Health Labour and Welfare survey shows that 80% of businesses plan to increase pay next year.
While the public faces rising taxes next year – including an increase in consumption tax and inheritance tax – the Abe administration continues to receive strong support from the public, indicating the public is “willing to swallow bitter medicine for the sake of its economic future”, says BNY Mellon.
The shift to a more inflationary environment is even having an effect on retail sales tactics, Kashima quips, citing a fictional anecdote. "In the past, salespeople used to say how good I looked [in a particular scarf]. Now they say, ‘Ma’am, the scarf will be 10% more tomorrow’."
“Given all that’s happening in Japan right now," she adds, "if I were a global asset allocator and still underweight, I’d be pretty uncomfortable.”