(Bloomberg) — Japan’s record rise in stocks earlier this year seems like a distant memory as the economy slumps and foreign investors sell stocks.
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Banks including Citigroup Inc. and Abu Dhabi Holdings Inc. have turned more pessimistic about domestic stocks due to uncertainties over corporate governance reforms and the Bank of Japan’s monetary policy. A Bank of America fund manager survey found that about a third of respondents believe the stock market has peaked.
Foreign investors, who pushed Japanese stocks to record highs a few months ago and outnumbered their overseas counterparts, were net sellers for four straight weeks through June 14, the longest stretch since September, according to data from the Tokyo Stock Exchange.
Japan’s blue-chip Nikkei stock average has stagnated since hitting an all-time high on March 22. It has fallen 5.6% since then, while the MSCI AC Asia Pacific Index has risen 1% and the fast-rising U.S. S&P 500 Index has risen 4.4% in that period.
“The optimism for Japanese stocks at the beginning of the year has clearly stalled,” said Hebe Chen, an analyst at IG Markets. “Investors are now asking themselves whether the dynamics of Japanese stocks are sustainable.”
Foreigners sell
The factors that have supported Japanese stocks so far are starting to drag the market down. Foreign investors, who had flocked to Japan’s unprecedented shareholder value-boosting measures, are now selling, selling a net 250 billion yen ($1.6 billion) worth of Japanese shares in the week to June 14, according to Tokyo Stock Exchange data.
According to Citigroup analyst Ryota Sakagami and others, Japanese stocks face the “risk of a significant correction” and it may be some time before any positive factors emerge.
weaker yen
Investors are growing wary of the yen’s relentless depreciation. While previously it was welcomed as a boon for exporters, the extent of its recent weakening has drawn attention to how it could hurt the Japanese economy, including raising inflationary pressures.
The yen fell on Friday, approaching 160 yen to the dollar, its lowest level since April, prompting Japan’s monetary authority to warn against excessive currency fluctuations.
“We want to see a certain bottom in the yen’s weakening trend,” Aisa Ikukoshi of JPMorgan Asset Management told Bloomberg Television, adding that that could be a positive for the domestic economy.
But despite the recent slump in stock prices, several strategists, including at BlackRock and Morgan Stanley, remain optimistic about Japan’s long-term prospects, citing structural changes such as corporate restructuring, domestic investment and rising wages.
Bank of Japan Outlook
Investors are watching to see whether the Bank of Japan will force through a second interest rate hike in July after first raising rates in March 2007. The Topix index of banks has risen 30 percent this year, about twice as fast as the overall Topix index, on hopes that higher borrowing costs will help financial institutions improve lending margins.
But expectations that the BOJ may delay raising interest rates have weighed on the banking sector recently, with the bank index down 5.2% this month and the Tokyo Stock Exchange down 1.7%. The monetary authority surprised market participants earlier this month by postponing the announcement of plans to reduce bond purchases until July. Swap rates suggest the probability of a rate hike in July has fallen to about 28% from about 66% at the start of the month.
Edinburgh-based abrdn favours Chinese and Indian stocks over Japanese ones over the next three to six months, said David Chou, investment director for multi-asset investing.
Zhou said in an interview that the company expects appropriate policy measures will encourage capital inflows into both emerging markets. As for Japan, foreign investors will need to see further progress in corporate governance reform before they are willing to invest more in the country, he said.
–Cooperation: Masaki Kondo
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