Photographer: Noriko Hayashi/Bloomberg

Foreigners Return to Add Momentum as Nikkei Surges 14th Day

Updated on
  • Topix, Nikkei 225 have touched the highest since at least 2007
  • Foreigners bought $5.8 billion of stocks at start of October

Foreign investors are returning to Japanese stocks, adding momentum to a rally that’s already taken shares to decade highs.

The benchmark Topix index is at a 10-year peak, while the Nikkei 225 Stock Average has climbed to the highest since 1996 to match a record 14-day winning streak, helping Japanese equities close a gap with other regional benchmarks.

The rally has until now been underpinned by domestic buying -- particularly the Bank of Japan’s purchases of exchange-traded funds -- rather than foreign investors, the traditional drivers of previous upturns, according to strategists. They have been kept at bay by the strengthening of the yen -- up 3.5 percent this year against the dollar.

Foreign investors bought a net 657.5 billion yen ($5.8 billion) of stocks in the first week of October, the most in 2 1/2 years, and some 1.32 trillion yen overall over the past three weeks as of Oct. 13, according to weekly data compiled by Bloomberg. The purchases come after nine straight weeks of net sales stretching back to July, the data show.

“Foreigners have been too obsessed with the movements of the yen when it comes to investing in Japanese equities,” said Ben Luk, global macro strategist with State Street Global Markets in Hong Kong. “We are seeing early signs that flows have bottomed out in terms of foreign investment. We believe there’s more to go to support the broad market as political instability subsides while earnings momentum continues to improve.”

Prime Minister Shinzo Abe closes in on an expected election victory this weekend after some early uncertainty, and the economic and corporate earnings backdrop continues to improve. While the Topix is up about 14 percent this year compared with a 29 percent advance in the MSCI Asia Pacific ex Japan Index, in the past month, the Japanese benchmark has gained 3.8 percent versus 1.3 percent for the regional gauge.

The Bank of Japan’s ongoing policy of purchasing large amounts of ETFs has supplanted some of the weakness in foreign purchases, according to Daniel Morris, a senior investment strategist with BNP Paribas Asset Management in London.

Read here about the drop in the correlation between the yen and Topix

The BOJ’s holdings in ETFs grew to about 16 trillion yen as of Oct. 19, according to data from the central bank website. The ongoing purchases have been a tailwind for stocks even as retail investors remain largely on the sidelines, with individuals selling a net 1.7 trillion yen in equities over a five-week stretch ended Oct. 13, according to Bloomberg-compiled data.

That investor cash could be deployed into equities if the Nikkei holds its gains and posts a sixth straight annual increase, said Kok Wei Yee, a portfolio manager with Fidelity International.

“Everybody likes asset classes that are long-term winners, so if valuations do not become excessive this could spark a harmonious cycle of supply and demand for Japanese equities,” Fidelity’s Yee said in a Oct. 17 report to clients. “Over time, higher highs for the Nikkei will encourage buy and hold domestic investors to enter the market.”

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