Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

(Updated )

Japan's stock market may have had an unpredictably rough year, but Mrs. Watanabe is still keeping her faith.

The Topix index has lost 8 percent over the past 12 months in dollar terms, compared with a less than 3 percent decline in the S&P 500. Yet individual Japanese investors -- the fabled Mrs. Watanabe -- are doubling down, plowing the equivalent of $26 billion into exchange-traded funds even as foreign ardor for Japan-focused ETFs that are publicly traded overseas cools.

Domestic Gung-Ho
Local exchange-traded funds are getting more money, while inflows into foreign-domiciled Japan ETFs slow
Source: Bloomberg
* Net inflow data for exchange-traded funds with at least 90 percent allocation to Japan; 80 of them are domiciled outside Japan, while 58 of them are in Japan.

To be sure, it's hard to quantify genuine retail demand for an asset for which the central bank is a major buyer. In the 12 months through February, the Bank of Japan bought the equivalent of $28.5 billion in exchange-traded funds. To the extent new ETF units get created to satisfy this outsized appetite, the assets under management of the funds would expand. Still, retail participation is unlikely to be insignificant, considering that the Bank of Japan's data show equity holdings of Japanese households rose by $133 billion in the first half of 2015 from the same period a year earlier, before stalling in the third quarter.

The flow of funds statistics are not yet available for the fourth quarter, but a near 10 percent increase in the Topix in the final three months of the year suggest a sharp pullback was unlikely.

This is setting the stage for a confrontation of beliefs. Either Japanese households will come around to sharing the growing global pessimism about limits of central banks' powers, dismissing the Bank of Japan's dive into negative interest rates as a last-ditch attempt to inflate asset prices. Or perhaps -- and this is more likely -- one or two quarters of strong performance by Japan Inc. will remind foreigners that the country still has a chance of boosting its 8 percent-plus return on equity closer toward the 11 percent offered by rest of Asia. Should the latter scenario prevail, Mrs. Watanabe would stand vindicated.

Wall of Worry
Japanese companies have seen large cuts over the past three months in year-ahead earnings forecasts*
Source: Bloomberg
* Data as of March 18; 3-month percent change in consensus estimates for next financial year's earnings per share.

Corporate governance mishaps can still spring pretty nasty surprises. Toshiba has lost 60 percent of its value in the past year amid a widening accounting scandal, and is now in the cross-hairs of a U.S. probe. But the sharp cuts in analysts' expectations of earnings for companies like Nintendo, Nomura, Sony, e-commerce heavyweight Rakuten and Uniqlo store operator Fast Retailing may have been overdone.

While there's a legitimate fear that a stronger yen would damage Japanese exporters' profits, which they have assiduously defended by sacrificing volume growth, there's ample cause for optimism. Nintendo's new messaging-based app reached the No. 1 slot among social-networking apps in Japan the day of its release, while Sony's virtual-reality headset made an aggressive low-price debut. Rakuten's renewed focus on its home market could also pay dividends.

Expecting much more from Prime Minister Shinzo Abe's economic reform program may lead to disappointment, but unless the yen lurches dangerously higher or the government sinks domestic consumption by saddling it with yet another increase in the sales tax next year, Mrs. Watanabe might just keep her love affair with Japanese equities going.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds information on Bank of Japan purchases in third paragraph.)

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Katrina Nicholas at