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Japan's retail investors fade into market background

Foreigners, trust banks pick up slack as individuals prune share to new lows

TOKYO -- Japanese retail investors slumped to a record-low share among domestic stocks last fiscal year as a rally spurred contrarians to sell and efforts to promote individual stock ownership foundered.

Individuals owned 17.1% of Japanese shares on a value basis at the end of March, down 0.4 percentage point from a year earlier, according to data from the four big stock exchanges released Tuesday. This is the lowest figure since such records began in fiscal 1970. The value of retail investors' shareholdings rose 9.6% on the year to 99.46 trillion yen ($892 billion at current rates), slower growth than the roughly 12% increase for all outstanding shares.

The number of individual investors grew by 230,000 to 49.67 million due to factors such as stock splits and smaller lots, which make shares easier to buy. Individuals are counted once for each company in which they own stock.

Selling into strength

Buying by individuals in initial public offerings and elsewhere seems to have been outweighed by selling. Domestic retail investors were the top sellers last fiscal year, as they unloaded more than they bought for an eighth straight year. Retail investors' share of the market dropped below 20% in fiscal 2013, the year that Abenomics policies took full flight, and this proportion shows no sign of recovering.

Individuals tend to swim against the market tide, selling during bull markets like the one that began last fall, and it can be tough for new investors to enter the market.

Structural issues also are at work. A survey by the Japan Securities Dealers Association shows that a majority of retail investors are 60 or older. When stocks are passed down from parent to child, they often are sold to pay inheritance taxes, said Seiichi Suzuki, senior market analyst at Tokai Tokyo Research Institute.

But a growing aversion to regular stocks also plays a role. "There are fewer stable-growth stocks in Japan than in the U.S., so individuals aren't inclined to buy and hold," said Toshio Araki of Securities.

That money instead flows into exchange-traded funds, which do not require the same sort of analysis as trading in individual stocks. Leveraged ETFs that magnify the returns of the underlying index are increasingly popular for short-term trading.

The government and the securities industry have tried to nudge young people to invest for the long term and build up their assets through avenues such as the tax-free investment accounts known as NISAs. But the hoped-for expansion of the investor base has yet to fully materialize.

The Trump trade

Overseas investors raised their share of Japanese stocks by 0.3 percentage point in fiscal 2016 to 30.1%, breaking 30% again after dipping below that mark in fiscal 2015. Foreigners were net sellers in the first half of the fiscal year but switched to buying after Donald Trump's victory in the U.S. presidential election in November, ultimately purchasing a net 85.3 billion yen over the full fiscal year. This factor, along with the stock market rally, lifted their Japanese shareholdings by 13% to 174.73 trillion yen at fiscal year-end.

The proportion of foreign-held shares grew in the electrical machinery, maritime freight and precision machinery sectors, Tokyo Stock Exchange data shows. After the win by Trump, who promised bold fiscal stimulus and other reflationary policies, "buying of economically sensitive stocks predominated in the Japanese market as well," said Ryoma Sugihara, director of equity sales at Societe Generale Securities.

Shareholder breakdowns for individual companies also show higher foreign ownership among makers of electrical machinery and construction equipment as well as trading houses. Foreigners flocked to Komatsu on hopes of stronger U.S. infrastructure demand.

Overseas investors pay particular attention to how effectively businesses use capital. Average return on equity at Japanese companies rose to 8.7% in fiscal 2016 for the first increase in three years, but still fell short of the more than 10% seen at American and European counterparts. Expect louder calls from foreigners for businesses to use growing cash hoards to reward investors.

Trust banks and government whales

Much of the stock unloaded by individuals passed into the hands of trust banks, which manage assets for clients such as public pension funds, including the gigantic Government Pension Investment Fund. The proportion of Japanese shares held by trust banks rose 0.8 point to 19.6%, the largest gain among all investor categories, while the group's total holdings jumped 16.9% to 113.93 trillion yen.

GPIF raised the target weighting of domestic shares in its portfolio from 12% to 25% in 2014 as part of a wider reform program, a move that boosted its gains from the market rally. But the fund "didn't add to its Japanese-stock holdings that much in fiscal 2016," noted Shingo Ide of NLI Research Institute.

After stripping out the effect of higher stock prices, much of the increase in trust banks' shareholdings stems from the Bank of Japan's buying of ETFs. The central bank lifted its annual ETF purchases from 3.3 trillion yen to 6 trillion yen last July, an amount included under trust banks in the investor data.


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