Fund Management

European Funds Smile On Japan's Business, Economic Prospects

Tom Burroughes Group Editor 26 July 2023

European Funds Smile On Japan's Business, Economic Prospects

One of the – not always loud – financial stories of 2023 so far has been the strong performance of Japanese equities, driven by greater international and domestic awareness that macroeconomic conditions and corporate reforms in the country are supportive.

European funds fell in love with Japanese equities in the spring this year, with enthusiasm for a revived corporate sector and improved growth prospects driving inflows.

According to Cerulli Associates, Japan equity fund flows in Europe turned net positive in April, registering €500 million ($561 million) of net new money across mutual funds and exchange-traded funds. In May, Japan was the second-best equity sector for net new flows, behind global equity large cap. Active Japan equity funds took in €2.3 billion, while passive flows trailed at €400 million.

Such figures chime with commentaries (see here, here and here) about the positive case for Japan. 

“Domestically, GDP growth has been relatively strong and rising inflation has signalled a change in the country’s economic fortunes,” Cerulli said. The comments come in The Cerulli Edge - European Monthly Product Trends. “Internationally, the fact that Japanese inflation has still lagged levels seen elsewhere in the developed world – and therefore not yet triggered the Bank of Japan to raise interest rates – has meant a weaker yen and greater price competitiveness of exports, as well as greater opportunities for foreign investment.”

Corporate governance reforms and increased shareholder activism, are also unlocking cash stockpiled on Japanese companies’ balance sheets. A wealth manager recently told this news service that the Nikkei 225 Index has potential to surge towards the 45,000 mark. (It is currently 32,682). To put the market's performance in context, the MSCI Japan Index of equities shows total returns since the start of January 2023 of 13.25 per cent (capital growth plus reinvested dividends, in dollars). By comparison, the MSCI World Index of developed countries' stocks is 13.7 per cent. 

Besides corporate governance changes, Japan’s market has also been buoyed by the pledge of JPX, the owner of the Tokyo Stock Exchange, to support measures that improve shareholder value. Last year, the exchange implemented more stringent listing standards designed to encourage foreign investment into the top-tier market, the TSE Prime. 

In June, famed US investor Warren Buffett, who’s actions and comments are closely watched, bought additional shares in Japan’s five largest trading houses. 

In other data, Cerulli said the Japan equity sector saw net inflows of €4.2 billion into actively managed products through May and June, compared with €900 million into passive products.  

At the start of 2023, 145 asset managers expressed mixed views about the demand potential of Japan equity funds, the report said. 

“Around a fifth of our managers included Japan in their top three equity sectors for future demand for active and index mutual funds (19 per cent and 20 per cent respectively); 29 per cent did so for ETFs,” Fabrizio Zumbo, director of wealth management research in Europe, said. 

To put the Japan position in context, Cerulli said managers are more bullish about the global equity, global emerging market, and China equity sectors. A third (34 per cent) expect China to be one of the most in-demand equity sectors in the active fund space for 2023–2024.  

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