Investors might already know the major impact foreign investors have on Japan’s equity market. Japanese equity returns tend to have a relatively strong correlation with the net inflows or outflows of foreign investors. This was witnessed in 2018 when Japanese equities decline of 16% occurred along with the largest foreign outflows since the global financial crisis. This year, according to data from the Japan Exchange Group, foreign investors have offloaded a net 1.5 trillion yen of local equities this year through to March 8.
The outflow was believed to be caused by concerns about Japan’s vulnerability to slowing global growth and rising trade tensions. A deceleration of China’s growth would create concerns for a fifth of Japan’s. Japan remains concerned about US auto tariffs on Japanese cars. Currently, 40% of Japan’s export to the US are through automobiles. Given the major impact those concerns have on Japanese equities, a chance of surprises throughout the year seems likely. China is likely to continue shifting their policy to encourage growth and limit impact of US tariffs. Additionally, the United States has been hesitant to enact new tariffs or enact auto tariffs in general. Those factors along with the idea that Japan remains a strategic ally in Asia—where the US is remains worried about China—raises the hurdle for auto tariffs even higher.
Yet, this trend has been ongoing for months now and despite such analysis, demand for Japanese equities has not yet picked up. Keith Knutsson of Integrale Advisors states “Timing when the many foreign investors will stop their selling activity remains difficult. ”