In April, Japan saw record foreign inflows in its equities as well as long-term bonds. This was due to global investors reallocating their capital away from American assets in response to US President Donald Trump’s aggressive tariff announcements.
Morningstar reports that data from Japan’s Finance Ministry shows net inflows of 8,21 trillion yen ($56.6billion), the highest monthly total since the government began keeping track in 1996.
The surge in foreign investment was driven by increased concerns about US policy stability and asset performances, which pushed institutional investors to diversify.
CNBC reported that Yujiro GOTO, Nomura Japan’s head of FX Strategy, said “Trump tariff shocks probably changed global investors’ perception on the US economy, and asset performance. This likely led to diversification from the US into other major markets, including Japan.”
US tariffs have triggered dramatic asset reallocation
The majority of the inflows took place in the immediate aftermath to Trump’s announcement in early April of “reciprocal tariffs”.
The US 10-year Treasury rate jumped 30 basis point from April 3 to 9 while Japan’s yield on 10-year bonds dropped 21 basis points in the same time period, reflecting a flight towards safety.
While global equity markets initially fell, Japan’s Nikkei ended the month more than 1% higher.
The S&P 500, on the other hand, fell by nearly 1%. Analysts attributed the divergence in performance to Japan’s status as a haven and institutional buying.
According to Nomura, the main drivers of inflows were pension funds, reserve managers and life insurers. Other asset managers also played a role.
Kei Okamura is Neuberger Berman SVP and Japanese equity portfolio manager.
“That obviously had a significant impact on the way global investors thought about the asset allocation to the U.S…. they needed diversification,” he told CNBC during a telephone call.
Analysts say that demand for Japanese assets will remain strong despite US trade deals
The recent shift in US administration’s trading posture — including a breakthrough with China and bilateral deals with allies like the UK — could slow the pace of the flows into Japan.
Many analysts still expect a strong demand for Japanese assets.
Vasu Menon is the managing director of OCBC’s investment strategy team. He said that Trump’s unpredictable policy moves, and frequent reversals, have eroded confidence in US assets.
He said that, “given such a background, demand for Japanese assets could remain healthy even if not as strong as it was in April.”
Menon said that the ongoing discussions between Japan and the US regarding tariffs has also led to some optimism about the reduction of the 24% “reciprocal tariffs” on Japan.
Support flows for the currency outlook and reforms at Tokyo Stock Exchange
Structure factors, as well as geopolitical factors, also make Japanese assets more attractive.
The Tokyo Stock Exchange launched its reforms in March 2023 with a focus on improving corporate governance.
Companies that trade below a price to book ratio of one are now required to either comply with the reforms or explain their reasons for not doing so.
This has led to a wave share buybacks that have boosted earnings per share, and supported valuations.
Asset Management One International stated that the initiative had increased the appeal of Japanese stocks for both domestic and international investors.
Many asset managers believe that there is still room for more inflows, especially with the Japanese economy showing signs it is recovering and the yen likely to strengthen if the US dollar continues to weaken.
Okamura said, “This trend is not going anywhere.” “Japan is likely to continue to see good flow.”
Short-term bonds have limited upside potential
While long-term bonds, stocks and other investments attracted significant foreign interest inflows, short-term Japanese Treasury Bills are unlikely to do the same.
Michael Makdad, Morningstar’s analyst, said that the arbitrage opportunities which existed when Bank of Japan maintained its negative interest rates are largely gone.
Japanese stocks, in particular, are benefiting from a convergence of favorable conditions — trade diversification and domestic reforms — as well as relative economic stability, making the country an attractive choice for global investors.
This post Japan records record fund inflows after Trump’s tariffs drive investors away from US markets could be modified as new developments unfold.
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