After a lapse of three months, the Japanese stock market finally regained its gains. The Nikkei 225 Index once again broke through the 40,000 mark on Tuesday, and the Tokyo Stock Exchange Index also reached a 34-year high last week.
On Wednesday, Japanese stocks continued to rebound. The Nikkei 225 Index closed up 1.3%, while the TSE Index closed up 0.5%. Over the past 5 trading days, the two major stock indexes have accumulated increases of 3.3% and 2.8%, respectively.
Behind the rebound in Japanese stocks, both foreign investors and retail holdings set historical records. On the one hand, due to positive prospects for the end of deflation, loose monetary policies, and improvements in corporate governance, a large amount of overseas capital poured into Japan; on the other hand, the early rise in Japanese stocks greatly boosted public confidence, and stock splits of listed companies also lowered the threshold for retail investors to enter the market.
Japan-related ETFs also saw a large inflow of capital, which collectively surged last week, but due to the sharp fall in the yen, some ETFs that did not hedge against exchange rate risks lost the market.
Japanese stocks set records for both foreign investors and retail holdings
According to a survey released by the Tokyo Stock Exchange on Tuesday, the number of individual shareholders of companies listed on Japan's four major stock exchanges increased by 4.62 million in fiscal year 2023 over the previous year, reaching a record 74.45 million.
The increase in the number of retail investors was not only stimulated by rising stock prices, but the price per share fell due to stock splits implemented by companies such as Nippon Telecom and Telephone (NTT), which made it easier for individuals to buy stocks.
The survey also showed that about 2.47 million people became new shareholders of the company that implemented the stock split, including 1.06 million additional shareholders added to NTT (25:1 stock split), Tokyo Disney Resort operator Oriental Land and the trading company Mitsubishi Corporation each added about 110,000 individual shareholders.
Furthermore, the new Japan Individual Savings Account (NISA) Tax Exemption Program, which began to be implemented in January of this year, has also boosted the number of individual investors. The program is aimed at small investors.
While the number of domestic retail investors soared, the share of Japanese stocks held by foreign investors climbed to a record high last year.
According to data released by the Japan Exchange Group on Tuesday, in the fiscal year ending the end of March, foreign-owned shares accounted for 31.8% of the total value, the highest level since comparable data was available in 1970. In 1970, that figure was only 4.9%. Individual investors accounted for 16.9%, while financial institutions accounted for 28.9%.
Furthermore, in the previous fiscal year, foreign purchases increased to 320 trillion yen (2 trillion US dollars), an increase of more than 40% over a year ago. They became net buyers for the first time after a lapse of three years, with a cumulative net purchase of 7.7 trillion yen.
It's also a Japanese stock ETF. Why is the return gap so big?
Echoing the rise in the general market, Japan-focused exchange-traded funds (ETFs) also experienced significant capital inflows, which collectively rose more than 2% last week.
Among them, iShares MSCI Japan Euro Hedge UCITS ETF (IJPE) rose 3.44% cumulatively last week, while Amundi MSCI Japan's ESG climate net zero emissions target CTB UCITS ETF (CJ1P) rose 2.42%. Both ETFs benefit from rising markets and positive prospects brought about by reduced volatility and stabilized inflation.
However, it is worth noting that although all Japan-related ETFs have clearly risen, the performance gap is huge.
Take EWJ and HewJ, owned by BlackRock iShares, for example. In the past year, Japanese stocks rose by around 20%. EWJ's return for the same period was about 10%, and HEWJ's return was about 30%.
Some analysts believe that exchange rate hedging is the main reason for the differentiation in ETF performance. EWJ tracks the MSCI Japan Index. Its holdings are mainly Japanese company stocks. HEWJ is an exchange rate hedged version of EWJ. More than 90% of its holdings are EWJ, and they also hold US dollar cash, yen to US dollar forward contracts, and US dollar money funds.
Due to high interest rates on the US dollar, the pace of interest rate hikes in the yen is slow, and the spread between the US and Japan is huge. Over the past year, the yen has plummeted by more than 12% against the US dollar, and last week it fell below the 160 mark, a new low since December 1986. As of press time, the yen traded lower than 161.79 against the US dollar.
Therefore, if the ETF does not hedge against the exchange rate, the sharp fall in the yen will greatly offset the gains brought about by the rise in Japanese stocks.