TOKYO -- With Japan's equity benchmark still on its longest-ever winning streak, the question of the moment is whether overseas investors will keep watching from the sidelines as Japanese shares surge or finally buy into the rally at sorely high prices.
The answer is likely to depend on how financial stocks fare.
Big foreign investors have yet to begin full-fledged buying of Japanese shares, says Jesper Koll, chief executive of WisdomTree Japan. The market probably will see some "pain trade" toward year's end, he added, referring to moves by investors who missed the rally to play catch-up and buy at higher prices as the rise continues.
The Nikkei Stock Average gained ground for a record 16th straight session Tuesday. The dollar-denominated Nikkei index, to which foreign players pay close attention, has gained about 8% since the start of September -- outperforming the 6% rise in New York's Dow Jones Industrial Average and the 1% increase in London's FTSE 100 index.
Still, public pension funds and other leading players abroad are maintaining underweight Japanese shares, turning instead to equities in Europe, which has recovered from the financial crisis, and elsewhere in Asia, where the economy continues to grow.
But foreign investors are apparently feeling at last the pain of missing out on gains in Japan. An influx of some 2 trillion yen ($17.5 billion) in funds hitting the Japanese market by year-end is a possible scenario, Koll said.
The prospective buyers are not hedge funds with short-term perspectives. Asset allocators -- who are responsible for determining global apportioning -- "have started checking out Japanese stocks," said Takashi Maruyama, Fidelity International's chief investment officer for Japan. These are long-term investors that "hold onto positions for three years at a minimum," he said.
To get big foreign investors to increase their exposure to Japanese stocks, rebounds in individual stocks would be essential. According to Goldman Sachs Japan, banking giants such as Mizuho Financial Group and Mitsubishi UFJ Financial Group are the most underweight issues among overseas investors.
With interest rates in negative territory, "Japanese banks have a tougher earnings environment than their American and European peers," said strategist Kazunori Tatebe of Goldman. But as typical cyclical stocks, banks are now enjoying such clear buy incentives as the ruling coalition's landslide win in the lower house election and robust corporate earnings.
Banks tend to serve as a bellwether, rising ahead of broader market upturns, as they did before the summer 2005 rally fueled by then-Prime Minister Junichiro Koizumi's postal privatization initiative and the Abenomics upswing that began in 2012.
Rumors are circulating that the chief of a leading sovereign fund will be visiting Japan next month to meet with top executives at companies here and see how corporate governance has improved. Whatever this chief concludes is sure to determine whether the fund will snap up Japanese shares.
The Nikkei average's 16-day winning streak is raising concerns of a correction. For the market to stay strong through the end of the year, the only hope is to bring in long-haul foreign investors.