TOKYO -- Overseas investors are on track to sell 5.3 trillion yen ($47.5 billion) more in Japanese shares than they bought in 2018, the biggest net sell-off since the Black Monday crash in 1987, as a global downturn in markets and Japan's lackluster economic policies scare them away.
The Nikkei Stock Average sank to a new year-to-date low on Thursday, ending down 2.8% at 20,392, as the latest U.S. rate hike drove down stock markets across Asia.
But the exodus from Japanese shares had begun long before. Foreign investors were net sellers of 161.3 billion yen of shares for the second week of December alone, according to data released by the Tokyo Stock Exchange on Thursday. Net selling for the year has already topped 5 trillion yen, significantly over the 3.7 trillion yen in 2008.
"More investors are converting risk assets into cash, a trend that has spread into Japanese stocks," said Deutsche Securities director Masakazu Yanagisawa.
Although share prices have fallen globally this year, Japan has suffered more than other markets because of a lack of progress on promised economic reforms. Prime Minister Shinzo Abe's namesake Abenomics policy came with three arrows: monetary easing, fiscal stimulus and structural reforms. But little progress has been made on the third arrow six years after he began his current stint in office.
Investors grasp few details about these policies or their potential impact and have lost a reason to hold on to Japanese shares, said Keith Truelove of UBS Securities Japan.
The Nikkei average is still 130% higher than it was before Abenomics, buoyed largely by exchange-traded fund purchases by the Bank of Japan. In comparison, the S&P 500 index, which includes strong technology issues like Apple and Amazon.com, gained only 80% over the same period. Unrealized gains in Japanese shares are only pushing more investors to lock in profits while they can.
Foreign players had flocked to Japan back when Abenomics first launched, buying a net 20 trillion yen in Japanese shares between November 2012 and May 2015. But the cumulative balance has since dropped to less than 10 trillion yen.
The central bank is one of the few mitigating forces. It has bought roughly 22 trillion yen in ETFs since 2010, dwarfing the investment by private-sector institutions like Nippon Life Insurance and Dai-ichi Life Insurance -- 9 trillion yen and 3 trillion yen, respectively.
Even domestic retail investors are on track to sell a net 92.5 billion yen of Japanese shares in 2018. Only businesses, most of which are buying back their own stock, and investment trusts are seen turning net buyers.
Foreign investors account for 70% of all trading on the Japanese stock market. It will take tangible improvements in the economy, such as an increase in consumer prices and capital investment, for them to buy back in, UBS' Truelove said. But key indicators like the consumer price index point to continued bearishness ahead.