Japanese stocks stagnate with wary foreign investors on the sidelines

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TOKYO — Japanese stocks have been more resilient than many markets this year and their valuations are attractive, with big exporters and global companies reaping big profits on the weak yen, which in normal times could spur investors foreigners to settle there.

But these are not normal times.

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As the yen’s slide accelerated, hitting a 24-year low last week and around 20% decline so far in 2022, foreigners moved away from Japanese stocks, selling 1.5 trillion yen ( $10.4 billion) of stocks from June to August. .

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Analysts and market participants say many foreigners, who account for about 70% of trading in Tokyo’s main stock market, have retreated to the sidelines as they sort out often conflicting market trends, including including Japan’s contradictory actions on the yen, while tending to take their signals from the collapse of overseas markets.

And that, they say, is keeping Japan’s equity benchmark stuck in a range, resisting tailwinds that could send it higher.

“The profits of Japanese companies are increasing while those of other countries are decreasing. Overall, Japanese equity valuations are low,” said Takeshi Fukushima, chief investment officer at BlackRock Japan.

“The fundamentals of Japanese equities are strong but they are collapsing on foreign elements.”

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Toyota Motor, one of Japan’s biggest exporters and a big beneficiary of the weak yen, has lost about 5.6% of its value this year, outpacing the nearly 40% drop of its American counterpart General Motors.

Japan’s benchmark Nikkei 225 is down 7.7% this year, compared to a 19.4% drop in the Dow Jones Industrial Average and a 26% drop in global stocks.

“The weak yen is obviously a positive for exporters and that’s why Japanese stocks are outperforming their overseas peers,” said Norihiro Fujito, chief investment strategist, Mitsubishi UFJ Morgan Stanley Securities.

But the Nikkei has held within a relatively narrow range of around 26,000-29,000 for the past six months, while valuations are still lagging at 12.11 times earnings for the next 12 months. in yen, against 17.23 times for the components of the Dow Jones.

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While domestic investors helped keep the market buoyant as foreigners left, buying a net 1.7 trillion yen in stocks during the June-August period, analysts and investors expect that the uncertainty surrounding the weak yen, and the yield gap between the United States and Japan that drove it, will keep foreigners wary.

“Japanese equities have uncertainties going forward as the outlook for the yen is unclear,” said Takamasa Ikeda, senior portfolio manager at GCI Asset Management.

Japanese authorities sent strongly mixed signals on the yen late last week, both intervening in the foreign exchange market to support the currency and doubling down on ultra-low interest rates that are pushing it lower. .

The yen weakened past 145 to the dollar after diverging US and Japanese rate decisions last week widened the yield gap, although the currency stabilized following Japan’s intervention .

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In Asian trading on Tuesday, the yen was around 144.5 to the dollar.

Ikeda expects the market’s focus on U.S. yields and monetary policies, particularly after the U.S. Fed announced a tough stance against inflation last week, will mean Japanese stocks will rise. will largely inspire foreign markets.

The Nikkei’s dollar performance, watched by many overseas investors, has tended to mimic its major overseas counterparts, falling 26.6% so far this year.

However, BlackRock’s Fukushima was optimistic that Japanese equities will attract more positive interest when overseas markets are less dampened and given their favorable fundamentals beyond yen weakness.

“They have an advantage because material and oil costs have dropped and the local economy is reopening,” he said.

“We can look forward to prospects for Japanese equities when overseas markets stabilize.” ($1 = 143.7000 yen)

(Reporting by Junko Fujita; Editing by Vidya Ranganathan and Edmund Klamann)

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