Japan: Resilient equity prices amid foreign selling - Nomura

Research Team at Nomura points out that foreign investors have been consistent net sellers of Japanese equities over the past six weeks and their selling accelerated last week to JPY754bn ($6.7bn), the biggest amount since mid-September.

Key Quotes

“Net selling reached JPY2617bn over the past six weeks.”

“Japanese equity prices have been resilient though. Since Abenomics began, foreign investors increased their Japanese equity exposure, leading to higher equity prices, but since mid-2015 foreign investors have turned net sellers. Globally, flows into the equity market have weakened, leading to the liquidation of Japanese equity exposure by foreign investors. The correlation between foreign investment in Japanese equities and Japanese equity prices was strong until last summer, but looks weaker recently. While foreign investment in Japanese equities has been largely flat since mid-2016, Japanese equity prices have performed strongly. The correlation breakdown began around the time when the BOJ announced it would nearly double its ETF purchases to JPY6trn per year in July.”

“The resilience of Japanese equity prices is likely limiting JPY appreciation too. As we noted previously, we judge FX hedging adjustment related to foreign exposure to Japanese equities is more significant than new equity investment flows. Early last year, equity-related flows have had a more significant JPY appreciation impact, even though foreign investors were net sellers of Japanese equities. However, as Japanese equity prices have been more resilient recently amid foreign selling, equity-related flows have been largely neutral for JPY.”

“Thanks to the resilience of Japanese equity prices, the negative feedback loop between Japanese equity prices and USD/JPY is currently weaker, in our view. Risk sentiment among retail investors is supported well, for example, which will likely lead to stronger foreign investment.”