TOKYO -- Amid renewed deadlock over Greek debt, business went surprisingly as usual on the Tokyo stock market Friday, with no signs of panic selling. The benchmark Nikkei Stock Average lost 65.25 points, or 0.31%, to finish the week at 20,706.15.
Overseas funds continued to flow into Japanese stocks, making Fast Retailing and Eisai investor favorites. Foreigners are buying Japanese shares because, according to Norikazu Akedo, a senior managing director at Nomura Securities, "they have become their safe haven." Japanese stocks are seen as safe assets with little downside risk.
With a looming U.S. interest rate hike -- this year's possibly most important event for the world's stock markets -- on the radar, emerging economies are worried about a repeat of the 1997 Asian financial crisis that triggered a mass exodus of funds. Emerging markets have attracted more long-term investors now, but still would not be able to escape ripple effects of the U.S. monetary move unscathed, says Edward Lee of Standard Chartered Bank.
Investors have few options indeed. U.S. stocks are seen as overvalued, while the Greek crisis still smolders in Europe. Chinese stocks are becoming volatile. By contrast, Japanese stocks have the advantage of a soft yen, which would underpin shares when the U.S. goes ahead with a rate increase. Few see Japanese stocks as overvalued, and the Bank of Japan is also shoring up the market through stock purchases.
The currency and bond markets now tend to fluctuate widely, as the difference in monetary policy between the U.S. and many other countries -- those in Europe and Asia that plan to keep monetary easing in place, including Japan -- has become more pronounced. The volatility indexes for currencies and bonds have risen above historical averages, the Tokyo-based Institute for International Monetary Affairs says. Backed by ample liquidity, however, the index for stocks has been rather stable.
Throngs of global investors are turning to Japanese stocks, which are underpinned by robust earnings. Japan's return on equity and that for the rest of the world are moving in opposite direction, says Jonathan Garner, strategist at Morgan Stanley. The ROE for Japanese companies has improved by 3 percentage points since 2011 and currently stands at 8%. But the multiples for companies in the U.S., Europe and emerging countries have declined.
The Tokyo stock market, where the money influx is slow and steady, shows no signs of overheating. The expected price-earnings ratio for companies listed on the first section of the Tokyo Stock Exchange stands somewhere between 17 and 18. But further scrutiny shows that defensive issues, such as foods and pharmaceuticals, have higher P/E ratios at 25-30, suggesting that funds are flowing into a select group of businesses with stable earnings.
The country's unprecedented quantitative easing has boosted the money supply, but funds have not reached the real economy. They instead have ended up being shuffled from one financial market to another in search of profitable investment. With the economy still fragile, investors hesitate to take big risks. As a result, relatively safe assets have emerged as money magnets.
Toshikimi Kaneki of Sumitomo Mitsui Trust Bank calls this phenomenon a "grass-fed bubble." It is a low-key, quiet bubble, so to speak. "There is a paradox here," he warns. "If everyone rushes to buy safe assets, they would not be safe any longer. A crisis scenario here is that prices will fall for one reason or another, and investors will get burnt."
The status of Japanese stocks as a safe haven leaves investors a bit anxious.