Worsening economic prospects in Japan this year have chased away foreign funds, leaving the world's No 2 economy behind Asian peers that are starting to attract new funds from abroad. Japan is grappling with its worst recession since World War Two and has been harder hit by the global downturn than other major countries due to its heavy dependence on exports.
A series of bearish economic indicators and a downgrade in Japan's growth outlook are limiting inflows of foreign money into the country's capital market. "Inflows into Japanese equities could be limited by views that share prices have not bottomed out. Perceptions that other Asian markets had bottomed out could be stronger," said Shoji Hirakawa, chief strategist of equity research at UBS Securities Japan.
Foreigners have been net sellers of Japanese stocks for nine straight months since last July, the longest streak, amid the economic slump and weaker prospects. Net selling of Japanese stocks by foreigners hit a record 1.9 trillion yen ($19.6 billion) in March, the highest since January 2005 when the Ministry of Finance introduced new calculation methods, according to ministry data. Foreigners' net sales of Japanese bonds reached 2.3 trillion yen in March, the largest since November.
Overseas investors have been net sellers for seven consecutive months, also the longest ever streak. A monthly poll by Bank of America Securities-Merrill Lynch Research in April showed investors sharply cutting underweight equity positions encouraged by a rally in March.
"Investors looking to play the global recovery are using China and emerging markets, rather than Europe or Japan, to do so," Michael Hartnett, co-head of international investment strategy at the US research company, said in the survey.
Portfolio managers are more optimistic on China's growth than at any point since 2003, the survey showed. Japan hopes to boost its economy with a record economic stimulus package, worth about 15.4 trillion yen or equivalent to about 3 percent of nominal gross domestic product. But pessimism over the outlook for Japanese growth intensified after the latest forecast by the International Monetary Fund.
It said Japan's GDP will fall 6.2 percent, far worse that its January forecast for a 2.6 percent decline, while it trimmed its GDP forecast for China to grow 6.5 percent instead of 6.7 percent. The IMF forecast in April that Japan's recession in 2009 would be far deeper than initially thought, while the growth rate in China would slow slightly. Tokyo's benchmark Nikkei share average fell about 42 percent in 2008, the biggest loss in its 58-year history.
The biggest casualties on the Nikkei 225 over the last six months were companies such as Nomura Holdings Inc, which lost more than 35 percent, Hitachi Ltd 24 percent and Takeda Pharmaceutical 22 percent. Analysts said Japanese corporations that have a huge presence in overseas markets in such sectors like machinery and autos could be exposed under selling pressure by foreign investors.
The fate of Japanese shares depends on the recovery of the United States, the biggest export destination for Japan Inc in the financial year ended in March 2008, but the market could be bottoming out after seeing the Nikkei average jump by more than 25 percent over a single month to early April, analysts said.
"One thing that's clear is that the crisis has prompted fund outflows from Japan, but this is same for other countries too," said Masaru Hamasaki, a senior strategist at Toyota Asset Management. "We have to remember that foreigners have steadily increased their holdings in Japanese stocks, so they could be exposed to bigger selling pressure by foreigners," Hamasaki said.
Foreigners' holdings of Japanese shares have been growing over the last two decades, but they fell for the first time in five years in the financial year ended in March 2008. A survey by five Japanese stock exchanges showed foreign investors held 27.6 percent of Japanese stocks as of end-March 2008, down from a record high of 28 percent in 2007. Foreign ownership has increased for most years in the last 20 years from only 4.3 percent in 1988. The data for the last financial year to March is set to be released in June, which is expected to show another drop in foreigners' holding of Japanese stocks, analysts said.
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