TOKYO -- Foreign investors with long-term horizons are driving the Nikkei Stock Average's sustained rally, which marked its 10th consecutive rise Thursday. They are pouring money into Tokyo stocks, encouraged by corporate governance reform, a positive outlook for government and monetary policy, and a soft yen.
Taken aback by the staying power of the rally led by foreign money, Takanori Tanabe, head of the Tanabe Economic Research Institute, said Thursday that "funds with nowhere to go are constantly streaming in."
Investors are favoring not only automakers and other exporters benefiting from the weak yen, but also such laggards as major banks and power companies. Turnover on the Tokyo Stock Exchange's first section ballooned to a nearly one-month high of 3.26 trillion yen ($26.1 billion).
"The main reason for the rally is a favorable supply-demand environment," said Hisao Matsuura at Nomura Securities.
The yen's sharp drop against the dollar is seen as a new buying incentive. A soft yen boosts profitability at exporters but increases raw material costs for companies reliant on domestic demand, resulting in a net positive for listed companies as a whole. Aggregate pretax profit rises by 200 billion yen to 300 billion yen when the yen weakens by 1 against the greenback, according to estimates by SMBC Nikko Securities.
Investors around the world are searching for higher yields. With nearly 30% of eurozone government debt offering negative yields due to monetary easing, money has moved from bonds to stocks. And expectations that the U.S. will raise rate this year have spurred a shift from American stocks, viewed as overpriced, to Japan.
Japan's economy is recovering, albeit gradually, while corporate profits are at record highs and corporate governance reform is leading to higher dividends and other shareholder returns. Public pension funds and the Bank of Japan support the market, and based on investment indicators, stocks do not look overvalued compared with the European and U.S. markets. And with Europe still contending with the Greek debt crisis, Japan is the easy choice by process of elimination.
Net buying by foreign investors has reached more than 2 trillion yen so far this year, with European investors buying roughly 760 billion yen in shares more than they sold in April alone, according to the TSE. The Nikkei average has advanced 9% over the past three months, standing out among developed markets.
Japan had long battled deflation and a strong yen. Since investors worldwide had been scaling back their holdings of Japanese stocks, a return to buying is likely to lead to a sustained bull market.
And domestic institutional and retail investors, which had taken a more cautious stance, "think they'll be too late if they wait for stocks to fall, forcing them to buy," said Tomohiro Okawa, equity strategist at UBS Securities Japan.
But a U.S. interest rate hike could destabilize stocks there and ripple out to the Japanese market. Market players are also growing concerned about China's economy and its volatile stock market. If global interest rates held down by monetary easing start to rise, money could flow back out of stocks.