TOKYO -- International investors are snapping up Japanese equities at a scale not seen in four years as long-term players including sovereign funds fill the vacuum left at home.
Net purchasing by foreigners totaled 2.43 trillion yen ($21.3 billion) in the five weeks through Oct. 27, based on Tokyo Stock Exchange figures released Thursday. The buying spree surpasses the 2.25 trillion yen of the six-week Trump rally last November and December. But it falls short of a 10-week, 4.69 trillion yen bonanza from October to December of 2013, when the expansion of the Bank of Japan's quantitative easing weakened the yen and attracted investors.
On a weekly basis, international investors bought 670.3 billion yen more in Japanese shares than they sold during the five days ended Oct. 27 -- the most in two and a half years. The TSE data covers the first and second sections of the Tokyo and Nagoya exchanges, as well as startup markets.
Overseas investors of all stripes are flocking to Japanese equities. "This time it's not just hedge funds, but also long-term investors like Asian sovereign funds and pension funds, that are buying Japanese equities," said Jun Makino of Credit Suisse.
Hedge funds started buying Japan stocks at the top of October. This was especially true of global macro funds, which act on geopolitical and monetary policy readings. Japanese Prime Minister Shinzo Abe called a snap election in late September.
Abe's coalition secured a landslide in the Oct. 22 vote. "After the ruling bloc won the lower house election, long-term money began buying," said Kyoya Okazawa of BNP Paribas in Hong Kong.
Unlike hedge funds, which specialize in short-term positioning, long-term investors usually hang on to assets for years at a stretch. Decisions by long-term portfolios to boost allocations of Japanese equities tend to result in a few months of purchasing. Such a development often supports sustained rallies in stock prices.
Strong corporate earnings in Japan are catching the eye of long-term investors. Outlooks released up to Thursday suggest that net profit at listed companies will climb 18.8% in the current fiscal year, a Nikkei Inc. review shows. This annual pace would outstrip the roughly 10% at American peers.
Selling at home
The Nikkei Stock Average now stands at 15.3 times forward earnings. Meanwhile, price-earnings ratios in the U.S. and Germany come to 20.6 and 16. Japan has better bargains than other countries, said Melissa Otto of Fidelity International, explaining the shift of funds from America to Japan.
The Nikkei average rose 10.7% from the end of September through Thursday. The Dow Jones Industrial Average gained 4.6%, while Germany's DAX rose 4.9%. International investors with minimal Japanese holdings are feeling the risk of being left out, according to WisdomTree Japan chief Jesper Koll.
Kazunori Tatebe of Goldman Sachs amplifies this view. "Foreigners have not bought enough Japanese equities, so the net buying position could continue for some time," Tatebe said.
Meanwhile, Japanese investors have not shared the enthusiasm of their counterparts abroad. As of Oct. 27, domestic retail investors had sold more Japanese equities than they bought for seven straight weeks to the tune of 2.78 trillion yen.
Japanese financial institutions were also net sellers for seven weeks in a row, by 681.9 billion yen. Trust banks, which reflect the trading habits of public pension funds, were net sellers by 339.1 billion yen.
The growing number of Japanese eager to ride the historic stock rally "intend to purchase during a drop-off," said Ryoma Sugihara of Societe Generale Securities. Such a strategy would also prop the market up.