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Japanese investors show strong appetite for foreign stocks

  • March 30, 2018
  • , Nikkei Asian Review , 07:00 a.m.
  • English Press

TOKYO — Japanese investment money is surging into foreign stocks as both retail and institutional investors step up buying in search of higher yields.

 

Japanese investors purchased 11 trillion yen ($103 billion) in overseas stocks, including funds, on a net basis from April 2017 through March 24, according to Ministry of Finance data. This compares with just 6 trillion yen in bonds. This marks the first time that net foreign stock purchases by Japanese investors outstripped net purchases of foreign bonds in a fiscal year since the ministry started compiling data in fiscal 1996.

 

In previous years, highly safe U.S. Treasurys and other bonds were the main foreign securities investments.

 

Retail investors are showing a strong appetite for mutual funds, adding 5 trillion yen to the balance over the last year as emerging-market and theme-based stock funds in fields like artificial intelligence and robotics gain popularity.

 

From April last year until February, for example, about 316 billion yen has flowed into the semiannual settlement Global Robotics Equity Fund and about 230 billion yen into Nomura’s India equity fund.

 

A 65-year-old man living in Fukuoka Prefecture invested about 10 million yen last May in a mutual fund targeting AI-related stocks like U.S. chipmakers Micron Technology and Nvidia. “AI is a long-term investment field,” he said, adding that the purchase has already reaped him as much as 3 million yen in capital gains.

 

A 33-year-old office worker from Tokyo, on the other hand, sold Japanese stocks like Sony and bought a mutual fund targeting Japanese, U.S. and European robotics equities. “A big advantage is that you can easily diversify your investment among domestic and foreign companies,” he explained.

 

Mutual funds for foreign stocks received net inflows for 18 straight months through February, research from Deutsche Asset Management shows. While Japanese investors are expected to be net buyers of foreign bonds, which are often bought directly, for this fiscal year, money is flowing out of mutual funds targeting foreign bonds. 

 

Institutional investors have also increased their investment in foreign equities through mutual funds. Banks and other savings institutions quadrupled their mutual fund holdings over the last five years to about 26 trillion yen at the end of last year. Many also invested in foreign hedge funds.

 

Other institutional investors like life insurers and pension funds have been directly buying foreign shares. Japan’s Government Pension Investment Fund has raised its holdings of foreign equities to 25% of its more than 160 trillion yen portfolio, up from 15% four years earlier, as part of an effort to diversify its assets.

 
Low global interest rates have prompted institutional investors to buy overseas stocks. The Bank of Japan’s monetary easing policies have kept yields on 10-year Japanese government bonds near zero, sending investors to U.S. and European bonds over the last few years. But investors are wary of raising their bondholdings, since U.S. long-term interest rates have not risen as fast as expected, so they have sought returns in foreign equities instead.
 

Overseas stocks, however, are subject to large price fluctuations and foreign exchange risks. The yen, which had been weak against the dollar through 2017, has gained strength this year, sending jitters through the stock market. Investors also risk losses if the influx of money into foreign equities forms a bubble that eventually bursts.

 

“Some banks with low earnings power are taking on too much risk in their securities investments,” said Hayanari Uchino at the Daiwa Institute of Research.

A Financial Services Agency report from last October also said many banks “have insufficient asset and risk management.”

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