Foreigners Help Japan’s Topix to Rally

Foreign investors are helping Japan’s Topix index catch up with a gauge of smaller companies after the two diverged for most of the year.

Japan’s Topix has rallied 28 percent from a low in June, bringing it closer in line with the Tokyo Stock Exchange Mothers Index. That gauge of start-up companies soared as much as 38 percent early in the year as the Topix was languishing in a bear market. The broader index is closing the performance gap because overseas investors are returning to larger shares, while smaller stocks have been stagnant, according to Tomoichiro Kubota, a senior analyst at Matsui Securities Co. in Tokyo.

“The difference in performance comes from the main investors in these indexes,” Kubota said. “Individual investors are the main actors for Mothers, while foreign investors take the lead with the Topix.”

Foreign investors abandoned large-cap stocks in the first half of the year as the yen strengthened and the Topix plunged as much as 23 percent. That selling had little impact on the Mothers Index, which rocketed to a nine-year high as retail investors snapped up stocks like pharmaceutical company Sosei Group Corp.

Fortunes have reversed in the second half of the year, after a selloff in small-cap shares sent Mothers into a bear market. The gauge has been trading in a narrow range since July. The Topix, meanwhile, is back in bull territory as the yen has weakened about 15 percent since the summer, bringing the two measures’ performances for this year within 2.7 percentage points of each other on a normalized basis. On a non-normalized basis, the Mothers Index was up 4.5 percent for the year through Tuesday while the Topix was down 0.7 percent.

The Mothers Index jumped 1.2 percent as of 10:40 a.m. in Tokyo on Wednesday, while the Topix was little changed.

Foreign investors, who sold Japanese equities for 13 weeks running at the start of the year, have bought 2.25 trillion yen ($19.17 billion) of shares over six weeks. Individual investors, who often take the other side of foreigners’ trades, have been selling during that same stretch.

“Right now the rise in Japanese stocks is being led by foreign investors,” said Koichi Kurose, Tokyo-based chief market strategist at Resona Bank Ltd. He said once the yen stops its current downward trend, domestic investors’ “money will probably start shifting toward smaller companies again.”

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