How Deflationary Pressures Have Affected Japanese Stocks
Can Japan's Nikkei Regain Its Footing?
Deflationary pressures have weakened market confidence in the central bank, and hurt Japanese stocks. Japanese equities experienced record outflows in April, according to BlackRock research based on exchange traded fund (ETF) flows, and Japan is now among the worst-performing equity markets this year in local currency terms, with the TOPIX index down more than 13% year to date, according to Bloomberg data.
Recent support for the market appears to be coming largely from BoJ purchases, which amount to more than 200 billion yen since April 11, our research shows.
Market Realist – Japanese stocks reported weak performance in recent months
Despite its best efforts, the Bank of Japan is unable to stem the yen’s rise and boost inflation expectations. Many observers believe the central bank is running out of options to spur inflation and growth in the country. The lack of success affected stock markets. The TOPIX (Tokyo Stock Price Index) is down around 14.6% year-to-date while the MSCI Japan Index is down 13.3%. In contrast, the MSCI World Index is down just 1.6% while the MSCI ACWI is down 1.4%. On the other hand, the S&P 500 index (SPY)(VOO) reported nominal gains of 0.13%.
As a result of a weak performance, many Japan-focused ETFs experienced huge outflows as investors rebalanced their portfolios in favor of safer assets in the global markets. The WisdomTree Japan Hedged Equity ETF (DXJ) witnessed year-to-date net outflows of $3.9 billion. Similarly, the iShares MSCI Japan ETF (EWJ) had capital outflows of $3.6 billion while the Deutsche X-trackers MSCI Japan Hedged Equity ETF (HEWJ) experienced net outflows of $355 million. Overall, investors pulled $4.9 billion from the Japanese stock market after the Bank of Japan left key interest rates unchanged in April. The momentum continued in the current month with outflows of $2.5 billion month-to-date.
Though the market is up 4.3% in the last month, the rally is in question. In the next part of this series, we’ll discuss the possibility of a rise in Japanese stocks over the next few quarters.
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