More juice left
A shift in Japanese portfolios may add a new zing to the country’s stock market.
Local Japanese investors’ holdings of equities are now worth 670 trillion yen ($5.7 trillion), more than they have invested in government bonds, a Breakingviews analysis shows. That’s a good omen. A similar bond-to-equity switch, which began in 2003, coincided with a doubling in Japan’s TOPIX stock index.
A repeat performance is possible. As hyper-expensive Japanese government bonds disappear into the central bank’s vaults, domestic investors – including households, companies and institutional money-managers – might put more money into stocks. That could help extend the 70-percent equity rally that got underway when Shinzo Abe became prime minister in late 2012.
Most of the big gains occurred in 2013, driven by foreign investors’ purchases of Japanese stocks. The TOPIX is up less than 9 percent in the past year. A surprise recession, brought on by last April’s sales-tax increase, threatened to make 2014 a dismal year for equity investors until the Bank of Japan rode to the rescue by expanding its quantitative easing programme in October.
Monetary magic alone will not sustain the surge. Japan’s soporific corporate culture also needs to change. A British-style stewardship code, which requires institutional investors to engage more actively with the companies they own, came into effect last year. Japan is also encouraging companies to focus on profitability with a new return-on-equity based stock index. A corporate governance code will follow. Add to this mix a weak yen and the prospect of lower corporate taxes, and Japanese companies may finally begin to reward long-suffering shareholders.
The country’s $1.1 trillion Government Pension Investment Fund has decided to double its allocation to local equities. And while households haven’t shown much enthusiasm for a five-year tax holiday on equity investments, corporate investors appear to be warming up to stocks.
Some of the increase in equity holdings may simply reflect higher valuations for what Japanese investors already own, rather than new allocations. But bond prices have also galloped, so the portfolio shift does suggest a renewed appetite for stocks. If the enthusiasm is sustained, Japan’s foreigner-led market rally could get a more enduring domestic lift.