Japanese retail investors finally appear to be buying into the domestic stock story nearly a year after Shinzo Abe's government began trying to jump start the economy.
Retail investors pumped $14 billion into local stock markets in January, the highest monthly amount in three decades, Goldman Sachs chief Japan strategist Kathy Matsui said Wednesday, citing Tokyo Stock Exchange data.
It’s a phenomenal amount in such a short period – to put it in perspective, Nikko Asset Management estimated in November that the Japanese retail community invested a total of $25 billion in local equity mutual funds in the six months from April to end-September.
Evidence suggests January’s heavy flow of domestic capital into Japanese equities may be a direct result of the tax-exempt investment schemes introduced last month to boost flows into riskier assets. The Nippon Individual Savings Account programme – modelled on the UK’s individual savings accounts (Isas) – offers mutual fund investors tax exemptions on capital gains and dividend income of up to ¥1 million ($10,000) every year for up to five years.
“They’re really dangling a big carrot to convince more retail money into the stock market,” Matsui told reporters at a press briefing in Hong Kong. “It may be early days. If the market crashes, it will be a blip. But $14 billion worth of retail [money] into Japanese shares is the highest monthly investment in 30 years.”
Japanese institutional investors, by contrast, are expected to invest more methodically. “They’re always slower to move,” Matsui said. “Remember most asset managers in Japan are not paid on performance, [and it’s the same] for CEOs.” The incentive structure in Japan – or the lack thereof – does not encourage quick investment decisions among the country’s institutions, she said.
“That doesn’t mean they won’t invest [in domestic shares eventually],” Matsui added. “But they’ll be slower.”
Local market rallies in the last year have mainly been driven by foreign investors, she notes. But the tables appear to be turning. Overseas outflows totalled ¥751.9 billion ($7.34 billion) in the final week of January, according to Ministry of Finance data. This was reflected in the Nikkei’s January performance, when it fell 8%. Japan's benchmark equity index is down more than 9% so far this year.
Matsui thinks positive domestic flows could provide more of a foundation for “a more robust and sustainable rally”, which is ultimately what government officials are aiming for. “They’re not looking for trillions of yen to go in overnight. That [money] will just flow out. They want [investors] to buy and hold investments over time,” Matsui said. “We’ll see. It’s still early days.”
Japanese investors have had very little reason to invest in equity markets over the past 20 years – the deflationary environment meant that sitting on cash or in bonds yielded about 0.5-2% for much of the period. Now that these same investments are yielding 0% equities seem like a no brainer.
Abenomics gave equity markets a much needed boost last year, with the Nikkei 225 up over 50% in 2013. Most of this money came from foreign investors but, barring any major market volatility, local investment into domestic equities could now carry some of the burden, she said.
Structural reforms still pending
The market consensus is that the first two arrows of Abenomics – quantitative easing and fiscal stimulus – were successful. With the Bank of Japan purchasing rising levels of government debt, the Japanese government hit its short-term target of reaching 2% inflation by year-end. But questions remain over the third and most important policy arrow: the implementation of structural reforms.
And while a weaker yen has boosted exports and local stocks, it has not yet led to the kind of wage rises needed to boost consumption. The Ministry of Health, Labour and Welfare reported a modest uptick in average wages from October to November. But at ¥310,000 ($3,042) per month the level is still well below the ¥400,000-plus that workers enjoyed from 2002 to 2008.
Increasing wages are essential for Abenomics to succeed, Matsui said. If wages stay flat or go down, the upcoming tax hikes and heightened electricity costs – which are high as nuclear power plants remain shut – will hurt the programme. “That’s why the government is leaning on companies to share the wealth," she said. "They’re swimming in cash. But it won’t be a good cycle if [that wealth is] not shared.”
Encouraging women to enter the workforce is another area that requires more attention. Matsui has been a proponent of this for years – she published a report in August 1999 arguing that equalizing roles in the workforce was a better solution to the country’s shrinking labour pool than loosening immigration laws or increasing birth rates, according to Bloomberg.
Nearly 15 years later, she praised Abe and his government for progressing further than any other administration in recent history.
But have they done enough? “Of course not,” she said. For example, there are still long waiting lists for childcare, which are preventing women from re-entering the workforce.
However, these issues go beyond the government. It will require companies to step up and revisit compensation packages and promotions. “This is a deep-rooted societal [issue], not just a government problem. Everyone has to chip in,” she said. And it is likely to take years.
