Global investors are shifting their focus back to Japan’s stock and debt markets, attracted by the promises of the newly elected reflationist government and seeking to diversify away from expensive U.S. and European markets.
Fund managers report that flows into yen-denominated stocks and bonds have remained strong this month as investors observed coalition negotiations and prepared for Sanae Takaichi, a right-wing candidate, to become the country’s premier. Takaichi was elected as Japan’s first female prime minister on Tuesday.
Her commitments to increased spending, tax incentives, low interest rates, and investments have propelled Japan’s Nikkei index to record highs, encouraging investors to consider reallocating funds from Europe and the booming Nasdaq.
“The election of Takaichi, along with the psychological boost of overcoming the ‘lost decades’ in Japanese stocks, is likely to drive inflows,” said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management in Boston. He noted that this could coincide with concerns about U.S. valuations and policy uncertainty, prompting some investors to shift from concentrated U.S. positions to Japan.
Financial markets have been thriving since September, aided by the Federal Reserve’s interest rate cuts, expanding a rally that was previously dominated by global tech and AI giants. Recently, major U.S. indices, European and Japanese stocks, gold, and bitcoin have all reached new heights.
Japan’s appeal lies in its stock market valuation. While the Nasdaq has risen 19% this year and trades at a hefty 34 times current earnings, the Nikkei has climbed 24% and offers a more attractive price-earnings (P/E) ratio of 22. In comparison, Europe’s STOXX index has increased 13% this year with a P/E of 18.
In the lead-up to Japan’s leadership election, foreign investors purchased 4.36 trillion yen ($28.9 billion) worth of Japanese stocks over two weeks through October 11, marking the largest consecutive weekly purchases since at least 2005. Prior to this, there had been three weeks of selling.
However, money managers anticipate that the shift from other markets to Japan will be cautious and selective. The main concern regarding the so-called “Takaichi trade” is that investors may not fully grasp the dynamics between the ruling Liberal Democratic Party and its new coalition partner Ishin, nor the new finance minister, Satsuki Katayama. While both parties are ideologically aligned, Ishin advocates for a smaller government, and Takaichi has already started scaling back her promises for increased spending to boost the economy and support households facing inflation.
Nigel Foo, head of Asian fixed income at First Sentier Investors, believes the Bank of Japan will continue to raise rates despite political pressures, and he remains positive on Japanese government bonds (JGBs). “We tend to buy more when others are panicking because that’s when we see value,” Foo remarked. “Given the valuation compared to German bunds, it looks very appealing. Additionally, if distrust toward the U.S. government persists, we could see more Japanese capital returning home.”
Van Luu, global head of solutions strategy for fixed income and foreign exchange at Russell Investments in London, agrees that Japanese investments in U.S. Treasuries are likely to come back to Japan. “Repatriation of Japanese investments from the U.S. appears to be the most probable source of reallocations at this time,” Luu stated.
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