'Abenomics' doubts drive foreigners off Japanese stocks, volatility spikes

[TOKYO] Foreign investors are bailing out of Japanese stocks as a wobbly economy feeds disillusionment about 'Abenomics', sparking bouts of volatility in a market increasingly shaken up by policy decisions of the Bank of Japan.

The trouble is that long-term focused foreign funds have turned bearish on doubts that Tokyo can pull Japan out of two decades of economic stagnation, despite more than three years of massive monetary and fiscal stimulus.

"There are many long-term investors who have given up on Japanese stocks as there are no structural reforms being delivered. Meanwhile, monetary policy decisions only have short-term effects," said Michiro Naito, executive director at equity derivatives at JPMorgan who recently visited Asian investors.

Net selling by foreign investors from January through May was roughly 4.5 trillion yen (S$57.48 billion) in Japanese cash equities, according to exchange data, a stark turn from net purchases of about 2.83 trillion yen in the same period last year.

Not surprisingly, the benchmark Nikkei share average has fallen 13 per cent this year, underperforming its global peers. The S&P 500 index is up over 2 per cent, while the pan-European FTSEurofirst 300 has fallen 9.0 per cent.

All of this has occurred amid a bleak backdrop for Japanese equities, as confidence has been sapped by worries over a sputtering economy, anemic inflation, weak external trade and sluggish consumption.

Moreover, a rebound in the yen has fed concerns about a hit to exporters' earnings, while anxiety over a possible credit rating downgrade after the government delayed a planned second sales tax hike has led investors to reassess Japanese risk.

It's a far cry from the optimism stirred by Prime Minister Shinzo Abe's ascension to power in December 2012, as the Nikkei catapulted to 18-1/2-year highs in June 2015, driven by his Abenomics prescription of monetary stimulus, fiscal expansion and structural reforms.

The yen is also much stronger now, with the dollar fetching 106.81 yen versus 125.85 at its peak in June last year.

Volatility has also periodically spiked, more or less coinciding with the foreign selling and especially in the wake of recent BOJ policy decisions, first on Jan 29 when the central bank unexpectedly announced it was adopting negative rates in its quest to beat back deflation, and then in late April when it stood pat even as many in the market expected more stimulus.

A level below 25 in the Nikkei Volatility Index, also referred to as a 'fear gauge,' is generally indicative of relative calm.

So a jump to near 50 in February and to 32 in May fed fears of more bouts of volatility, not helped by uncertainty over BOJ policy.

"If you look at when the market goes up, is it going up because the fundamentals are improving? No. It's going up because there was negative economic data and people are hoping that the BOJ will inject more money," said Olivier d'Assier, managing director of Asia Pacific at risk management firm Axioma Inc.

"Investors are caught in a binary situation now, either BOJ is going to intervene, or not," Mr d'Assier said.

At this week's BOJ meeting, analysts expect no change although a Reuters poll predicted another dose of stimulus will be delivered at its July review.

The Fed meeting this week and risks of Brexit - Britain potentially exiting the European Union - were also expected to stoke volatility in the near term.

Meanwhile, more brokerages' views have turned bearish.

In the latest fund manager survey by Bank Of America Merrill Lynch, allocations in Japanese equities in April hit the lowest since the start of 'Abenomics'.

And Morgan Stanley Securities cut its Topix target by 12.1 per cent to 1,230 from 1,400 at the end of this fiscal year. The new target is 8 per cent below the current Topix level.

"Many investors don't think Japanese stocks as a good long-term investment," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.

REUTERS