Japan’s stock market is soaring to multi-decade highs, but large investors with long memories are staying out. Riding a wave of buybacks and strong corporate earnings, the broad Topix index scaled peaks not seen since 1990 this week. However, many foreign asset allocators are reluctant to venture into the market due to the perilous policy path ahead.
The research arm of BlackRock recommends an “underweight” allocation to Japan and is waiting for policy uncertainty to clear. Swiss wealth manager Union Bancaire Privée is also underweight Japan, with the policy outlook presenting currency risks. UBS’ chief investment office is neutral and prefers China as a global slowdown looms.
The policy and communication challenge for new Bank of Japan governor Kazuo Ueda is a tricky one. He has begun laying the foundations for a shift by saying the bank will debate an exit strategy from its policies once inflation looks stable. While he believes it is too early to discuss specifics, markets are already worrying about the fate of the BOJ’s vast asset holdings and expect the yen could quickly reverse last year’s precipitous decline if its loose policy settings look like they may be unwound.
Warren Buffet has increased his stakes in Japan’s trading houses and says he is eyeing other purchases. However, foreign flows into open-ended Japan funds are already turning fickle, suggesting a sustained turnaround is some time away.
Overall, investors remain cautious as the Bank of Japan’s new governor plots a course back to normality. Until policy uncertainty clears, many investors are likely to stay out of the Japanese stock market.