At WisdomTree, we track a very interesting weekly statistic reported by Japan’s Ministry of Finance (MOF)—the net flows from foreign investors into Japan’s equity market.1
As of June 16, 2017, approximately $2.7 billion had gone INTO Japan’s equities for the 2017 year-to-date period. That compares to $155 billion in 2013, $22.5 billion in 2014, $3.5 billion in 2015 and nearly $40 billion OUT in 2016.2
In short, the year-to-date data indicated a reversal from a very large outflow year (2016), but still negligible interest in Japanese stocks from foreign investors.
The Disconnect: Investor Activity vs. Central Bank Policy
We, like most other global investors, have seen the phenomenal run that U.S. equities3 have enjoyed since recovering from the 2008–09 global financial crisis. In our discussions, one of the universally accepted contributing factors was the responsiveness of the U.S. Federal Reserve (Fed) in its monetary policy.
Today, the Fed has begun a policy “normalization” process and is contemplating reducing its balance sheet.
Japan represents a market where not only is there policy support to keep rates low, but the central bank is buying equities directly to support the markets and reduce risk premiums for investors.4
Valuation & Earnings Growth Present a Strong Combination
One of the most interesting manifestations of the Bank of Japan’s policy becomes visible when considering the relative valuation of Japanese government bonds (JGBs) versus equities. A classic methodology would be the Fed Model, comparing equity earnings yields to 10-Year government bond yields. The key: high earnings yields (low price-to-earnings (P/E) ratios is another way to say this) and low 10-Year government bond yields.5
