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Why Yes, That Is Japan Giving Asian Stocks a Boost

6 May 2013 in Trading Ideas

One could understand how investors may have given up on Japanese equities. As a whole, they haven’t been incredibly lucrative either in the short or long term. The Nikkei 225 Index, for example, had not really moved significantly in the past three-and-a-half years – and even worse, they were essentially at the same level they were 10 years ago.

From a fundamental point of view, this made some sense, given how the Japanese economy had been stagnating for two decades – its export-driven economy feeling the pain of a strong currency and an aging population.

So, have you checked out Japanese stocks lately?

The Nikkei just closed out a month of rising nearly 12%, a little extra icing on what has now been a six-month jump of nearly 57%.

As the Wall Street Journal pointed out last Monday, this run hasn’t escaped the attention of large global investors, who have helped to fuel April’s surge.1 The rally in Japanese stocks kicked into an even higher gear following the April 4 announcement by the Bank of Japan intended to boost inflation to 2% within two years, the Journal reported, with the hope of stimulating the economy and creating the expectations that prices will rise.

While the BOJ’s move was mostly in line with policies championed by new Japanese Prime Minister Shinzo Abe, it was even more aggressive than expected by some, leading many global investment banks to recommend to clients a higher exposure to Asian stocks, the Journal said.

According to Citigroup, weekly inflows into Japan-focused equity funds reached a record in April.

asian fusion motifThe performance in Japan has also helped boost the Asian Fusion motif, a portfolio of stocks of Asian companies with at least 75% of their sales coming from Asia. The motif, which is weighted by nearly 42% with Japanese stocks, is up 7.7% in the past month and has now risen 4.3% in 2013.

However, the rally in Japan has been a bright spot in what has otherwise been a mixed performance recently by Asian stocks. In China, for example, concerns about slowing growth have contributed to the Shangai Index’s decline of more than 2% this year.

But JPMorgan analyst Tai Hui sees Asian stocks in general as occupying a “sweet spot” right now, with an improving macroeconomic picture driving net inflows into the region’s equities.2 Hui notes, for instance, that even with concerns about India’s economy, the country’s stocks have seen net inflows in 11 of the past 13 years.

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Also driving investor money into the region, Hui says, is the flood of liquidity from all of the quantitative easing programs throughout the world. With loosening monetary policies expected to continue, so should net inflows.

For investors who benefited from that six-month jump of 57%, that could be a signal that, despite the risks of jumping into a sector that has already enjoyed a run-up, it could be OK to remain optimistic about the prospects in this region.

1Daniel Inman and Bradford Frischkorn, “As Nikkei Soars, Japan Attracts Money,” WSJ.com, April 29, 2013.

2Assif Shameen, “Strong Upside for Northeast Asian Equities, Says JPMorgan’s Tai Hui,” TheEdge.com, April 25, 2013, http://www.theedgemalaysia.com/personal-finance/236814-strong-upside-for-northeast-asian-equities-says-jp-morgans-tai-hui.html, (accessed April 30, 2013).