Nikkei Soaring on Local & Foreign Flows

<p>Here are the realities of global capital flows into Japanese equities: Weekly Japanese purchases of foreign stocks (red graph below) have reached a net negative […]</p>

Here are the realities of global capital flows into Japanese equities:

Weekly Japanese purchases of foreign stocks (red graph below) have reached a net negative ¥270 billion, which means Japanese investors were in fact net sellers of non-Japanese stocks. The figure is a slight decrease from the prior week’s ¥442 billion, which is the highest reading for net Japanese selling of foreign stocks on record.

Weekly Foreign purchases of Japanese stocks (white graph below) have hit a 9-year high of ¥1.12 trillion. Considering this figure is sufficiently near the 2004 record of 1.15 trillion and that foreign interest is merely starting, a new record high is imminent.

What’s Different this time?

The positive correlation between foreign purchases and the Nikkei is evident. Rising foreign demand for Japanese equities tends to boost the domestic index. But another important determinant of the index is Japanese flows. Note the 175% plunge in Japanese net purchases of foreign stocks from October 2012 to the first week of March 2013. Over the same period, foreign net inflows to Japanese stocks soared 550%.  It is no surprise that all the Nikkei’s 23% rally in 2012 began in mid October, coinciding with then candidate Shinzo Abe’s pre-election manifesto to reflate the economy and force the Bank of Japan into unlimited asset purchases.

Unlike in other periods, the current 6-7 month phase of Japan-bound investments stands out in terms of duration. Looking at the chart, volatility is rather noticeable.  Late Q1 2011 witnessed relatively sharp flows in the favour of Japan from local and foreign investors, but those were short-lived.

The Nikkei is already +17% this year, rallying more than any other equity index. This may sound excessive for three months, But as we indicated last week, the index is only 56% above its 2008 lows (aka generational lows), which compares to +120% for its global peers from their own generational lows. Considering that such moves are the result of PM Abe’s promise to reflate the economy, rather than the actual implementation of these programs, these gains could only be justified as PM abe has a 2% inflation target to achieve.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.