(Reuters) – Japanese investors are hesitant to own their own stock markets despite the Nikkei index’s recent surge above bubble-era peaks due to uncertainty about sustainable company earnings and lingering memories of the market crash of the 1990s.
Instead, they are putting more money into foreign stocks, attracted by the promising prospects of U.S. stocks and its technology sector, as well as emerging markets such as India.
IN NUMBERS
Japanese equity funds focused solely on domestic markets received just $1.2 billion in January, compared with inflows of $7.8 billion into foreign-focused funds, according to Morningstar.
Of that amount, U.S.-focused equity funds received $3.8 billion and global equity-focused funds received $3.1 billion. During the same period, inflows from Indian equity-focused funds stood at $763 million.
WHY IS IT IMPORTANT
After a stellar rally driven mainly by foreign investors, the local market needs domestic supply to sustain its upward trend.
According to the Bank of Japan, Japanese households hold about $7.7 trillion in cash and deposits, meaning they could have a significant impact on the Nikkei index. They hold only 13% of their assets in stocks, significantly lower than 40% in the US and 21% in Europe.
The index is slowly retreating from this week’s record high after a year-long rally fueled by low valuations, corporate reforms and investment flows diverted from the battered Chinese stock market.
KEY QUOTES:
“While foreign investors have shown significant interest in Japanese equities, institutional clients are looking for confirmation that Japanese individual investors are also actively buying their own market,” said Wei Li, portfolio manager at BNP Paribas (OTC:) Asset Management.
“To maintain positive momentum in Japan, it is critical that household assets shift from deposits to equities, which the NISA program is designed to facilitate.”
NISA, or Nippon Individual Savings Account, is the Japanese government’s tax-free investment program for individuals that aims to turn trillions of yen held in cash by households into investments in the stock markets.
“The strong performance of the Japanese market relative to global peers is expected to encourage individual investors to invest more in their domestic market over time,” Lee said.