Japan stocks boosted by $51bn in foreign cash, led by U.K.

  

Japan stocks boosted by $51bn in foreign cash, led by U.K.

Middle East oil money flowed in from London in fiscal 2023 as investors shunned China. The Nikkei Stock Average has climbed 52% since the end of 2022.

TOKYO/LONDON -- The flow of foreign money into Japanese stocks reached a 10-year high in fiscal 2023, driven by investment from the U.K. -- including Middle Eastern oil money via London -- as well as South Korea and China.

The net tally reached 7.69 trillion yen ($50.7 billion), according to Tokyo Stock Exchange data released Thursday. This is the fourth largest in data going back to 1983, and marks the first net inflow in three years. It is the highest since 9.5 trillion yen in fiscal 2013, when then-Prime Minister Shinzo Abe's Abenomics policies sparked a rally.

European investors are the main driving force. An analysis of Finance Ministry data shows net purchases of 8.7 trillion yen for Japanese stocks, including fund holdings, in Europe from April 2023 to January. This accounts for the vast majority of net buying by foreign investors in that data.

Who is doing the buying has changed since the Abenomics boom. Germany, a net seller in fiscal 2014, was a net buyer last year.

The U.K. was a clear leader in fiscal 2023, as investors there bought a net 823.1 billion yen in Japanese stocks per month, soaring from the monthly average of 7.4 billion yen for the April 2018-March 2023 period.

This increase stems from oil money. The City of London, the U.K.'s financial hub, has had deep ties to the Middle East since the 1970s, playing a role in the global spread of money from the region. London hosts offices of sovereign wealth funds like Saudi Arabia's Public Investment Fund and the Kuwait Investment Authority.

As oil money flows out of Chinese stocks due to concerns about the country's economy, some of it is going to Japanese shares instead.

An executive from a Japanese financial institution who participated in the Saudi Capital Market Forum in Riyadh during February expressed eagerness to market to the region, saying, "I felt the country's enthusiasm for realizing [the Saudi government's] 'Vision 2030' economic reform plan centered on growth as an investment powerhouse."

Japanese stocks are appealing in part because of their relative cheapness given the yen's depreciation against the pound.

The tepid 7% increase in London's FTSE 100 Index since the end of 2022, compared with the Nikkei Stock Average's 52% rise, also is driving British money to Japanese stocks.

"Foreign investors in Europe are in a period of 'relearning' Japanese equities and are looking for new investment opportunities," said Nicola Takada Wood, portfolio manager at U.K. investment firm Redwheel. "My fund is also receiving many new inquiries."

Hong Kong bought the second-most Japanese stocks after the U.K., with net purchases of 99.8 billion yen per month, supported by Chinese money. China restricts the exchange of yuan into foreign currencies, pushing wealthy people to open accounts at Hong Kong securities companies to make investments.

However, capital controls remain in China, and access to overseas assets requires government approval under the Qualified Domestic Institutional Investor program, which is off limits to retail investors.

Overseas investment routes for individuals are limited to a few vehicles such as Japanese exchange-traded funds (ETFs) listed on the Shanghai Stock Exchange. In January, retail investor money flooded into Japanese stock ETFs, leading to a trading halt.

South Korea also has a strong presence, with net purchases of Japanese stocks for 12 consecutive months since April 2023, data compiled by the Korea Securities Depository shows. Net buying over that period reached $1 billion.

"Compared to South Korean stocks, which have an extreme 'Korea discount,' Japanese stocks feel safer," said a 37-year-old office worker in Seoul who invests in Japanese semiconductor-related equities, referring to the tendency of South Korean companies to have lower valuations than global peers.

In contrast, the U.S. had a relatively small presence for its market size, averaging just 65 billion yen in net purchases per month from April 2023 to January.

While value investing tends to be a forte of U.K. investors, the U.S. is stronger in growth investing. The Japanese market is currently being driven more by the former than the latter, with strong momentum in value stocks and large-cap shares.

"Many U.S. investors are considering increasing their holdings in Japanese stocks because they feel like they are lagging behind," said Tomo Kinoshita, global market strategist at Invesco Asset Management.