TOKYO -- Japanese stocks are extending their winning streak on a gusher of investment money flowing in from around the world, even as global financial markets face uncertainty over an expected U.S. interest rate hike and China's economic slowdown.
The Nikkei Stock Average rose for a fourth straight session Wednesday to reach 20,868, its highest in more than 18 years. A wide range of investors including hedge funds and those with a long-term outlook stepped in, assured by progress toward a Greek bailout deal, John Joyce of Goldman Sachs Japan said.
The Nikkei index has more than doubled in the past two and a half years, driven by foreign investment. Overseas investors have increased Japanese shareholdings by around 90% since December 2012, when Shinzo Abe took office as prime minister, U.S. research company FactSet says. Their holdings now total roughly 180 trillion yen ($1.45 trillion).
In the latest rally, investors from Southern Europe and Asia boosted their presence.
Spanish investors have more than quadrupled their Japanese shareholdings. An investment trust affiliated with financial giant BBVA tracks the Nikkei average and invests in stocks such as Fast Retailing and SoftBank.
Stocks in emerging economies will likely take a hit from the anticipated U.S. rate hike. But Japanese shares could benefit as a bigger rate spread between Japan and the U.S. would boost the dollar against the yen, helping Japanese exporters. Asian investors see Japanese shares as relatively unaffected by a U.S. rate hike, Eiji Uejima of Daiwa Securities said.
Japan Inc.'s efforts on corporate governance reform also have been well-received.
Though some have begun to worry about overheating, the price-earnings ratio on the Tokyo Stock Exchange's first section suggests otherwise. The current P/E ratio of 17 pales against a ratio of over 100 reached during the IT bubble and compares with 19 in the U.S. and 16 in Germany.
Japanese shares also are propped up by an increase in investment by government pension funds and the Bank of Japan.
And the stability of the government is a tailwind, said Hideshige Watanabe of Sumitomo Mitsui Asset Management. European Union members often disagree over monetary policy, and the U.S. has a presidential election next year. Foreigners see the relatively high approval rate for Abe's cabinet as an incentive to buy Japanese shares.
Meanwhile, domestic retail investors are skeptical of the outlook for Japanese stocks. Individual investors have sold over 16 trillion yen more in domestic stocks than they bought since the start of Abenomics fever, and they continue to sell actively.
The Nikkei's next milestone is 22,666, a level reached in 1996 when a weakening of an overly strong yen raised stock prices. Whether Japanese stocks can sustain high prices this time will hinge on individual companies' efforts to make themselves appealing to investors, such as boosting capital efficiency.