Foreigners are the biggest players in Japan’s stock market, accounting for more than half the trading value of the Tokyo Stock Exchange. Sales of Japanese stocks by foreign investors in FY2018 exceeded purchases by about 5.63 trillion yen, the largest net total sales since the Bank of Japan began its extraordinary monetary easing measures under the 2nd Abe regime.
Kazuyuki Suzuki, a long-term market watcher and an analyst of Japanese stocks, says it is important to know why foreign investors sell and buy Japanese stocks.

Investment
Japan (IJ):

How do you explain the large net sales of Japanese stocks by foreigners these days?

Suzuki:

I would say that two factors move foreign investors: politics and the economy, the same as for other investors. But more precisely, foreign investors look closely at movements in Japanese politics and the global economy. With regard to Japanese politics, we are awaiting the Upper House elections in July to compare the Liberal Democratic Party's (LDP) results with those in 2013. As for the global economy, it has a very direct effect on Japanese business and, therefore, the Japanese stock market is quite sensitive to its movements. Foreign investors buy Japanese stocks when the global economy is strong and sell when it is weak.

Take a look at the graph below. Foreign purchases grew strongly after 2013, following the LDP's big victory in the Upper House election and the announcement of Abenomics. That flow changed in 2015, when the China Shock (a series of yuen devaluations) hit, followed by a collapse in oil prices.

You may notice the correlation between foreign purchases and market performance ends in 2016. That was when the BOJ began its extraordinary easing of monetary policy, characterized by negative interest rates, and large purchases of ETFs.

The most recent market peak occurred January 2018, the so-called Trump rally, when the global economy reacted to passage of the President’s tax bill in the US Senate.  Since then, foreigners in the Japanese stock market have been net sellers, occasionally coinciding with a slowdown in the Chinese economy.

 

IJ:

Some people worry about the current inactive trading at TSE. Do you expect to see activity picking up any time soon?

Suzuki:

People have been talking recently about the thin trading and asking when foreigners would start buying or selling. It is a sign that a move is coming. I would say the countdown is nearing zero, and then the Japanese stock market will either go upward or downward. However, nothing you can predict moves markets. It takes something unpredicted to shake up markets, such as President Trump's tweets or his canceling negotiations with China. 

The state of US-China economic relations is a concern beyond the G20 and the 30th anniversary of Tiananmen in June. Sorting things out will take a long time. The US insists that China must change its economic behavior, saying don't copy, don't steal information from IT networks. That touches some rather thorny and fundamental issues, much like the Japan-US Structural Impediments Initiatives in the 1990s. While there's been no drastic shift in US-China relations, some anticipated investments in 5G, IOT, self-driving car systems, etc. are being re-evaluated and kept on hold. That is why the global economy and the Japanese stock market have cooled recently.

IJ:

Foreign investors also own a dominant percentage of shares in Japanese stocks. Have they changed their preference for certain issues? Do you see any new trends there?

Suzuki:

The ratio of foreign shareholders of Japanese stocks grew from around 5% to 30% in the last 20 years, mostly replacing Japanese financial companies who held mutual shareholding relationships.

Among companies whose foreign shareholder ratios have decreased, JAPAN TABACCO INC. is particularly challenged by the trend toward ESG investment. CANON INC. is losing popularity because its business prospects have dimmed. The company can't jump into the promising market of mirrorless interchangeable-lens cameras as easily as its rivals, because it maintains such a dominant stake in older cameras. On the other hand, are companies like Asahi Group Holdings, Ltd., the beer group, whose ratio of foreign shareholders is increasing simply because its business is growing steadily.

It is very interesting to see that foreigners have increased their shareholder ratios in some young and rather small companies. Those companies tend to be focused on a single issue solution, unlike large established enterprises who are focused more broadly. For example, GMO Payment Gateway, Inc. serves the cashless movement; AIN HOLDINGS INC. engages with dispensing pharmacy chains; BrainPad Inc. provides AI solutions; Japan Best Rescue System Co., Ltd. (JBR) supports those in trouble, especially elderly people. Thanks to TSE's mandate of disclosures in English, foreign investors — even individuals — can immediately access financial reports of Japan's listed companies, making it easy to identify and analyze new and interesting companies.

IJ:

Are foreigners keen to see changes in Japan?

Suzuki:

Japan is the world most rapidly aging country, where shifts in social policy are outpacing the rest of the world. The country is experimenting with new legal, community structural, and technological systems to fit its aging society. The company I mentioned earlier, JBR, is a good example. It provides services to elderly people who, for instance, can't change light bulbs on their own, can't use PCs well, or can't clean up their front yards. Meanwhile, we expect marketable developments in immuno-suppressant drugs, iPS cells (broad stem cells), and auto-driving systems even for those with early Alzheimer's.

We are now seeing the products, companies, systems, and policies of the Dankai generation (those born in the late 1940s) being challenged by the Dankai-juniors who were born in the early 1970s.

The convenience stores and home-delivery services created by the Dankai are no longer profitable. Japanese businesses have heretofore relied on volume to produce growth. Sales revenue equals volume times unit price, so businesses simply produced more cars or opened more shops, build more factories, etc. This volume model doesn't work anymore. Then, can they raise the unit price? Japanese consumers, who have been marinating in a deflation mindset, won't accept this. So, Japanese business has hit a brick wall.

The new and rather small single-issue companies started by the Dankai-juniors may change things. Replacement is a key to finding growth markets — replacing cash, replacing department stores, replacing water supply systems, etc., just as Steve Jobs replaced land-based phones with iPhones.

IJ:

Thank you very much.


Kazuyuki Suzuki

Japanese stock analyst
Certified Market Analyst (CMA), The Securities Analysts Association of Japan

Kazuyuki Suzuki joined Daiwa Securities in 1983 after graduating Chiba University.  He was assigned to Daiwa’s stock trading team in 1987 and has remained in Japanese equity trading operation since then.  He was at the frontline of trading during the market’s bubble years, through its burst, and afterwards.  In 2000, he joined Infostox.com as Chief Analyst for the Research Department. 

He regularly appears on TV, radio, and money magazines and newspapers where his analyses and friendly demeanor attract many Japanese investors.