Japanese Equity Markets Witness Outflows worth $7.2 Billion

Investors significantly withdrew from Japan-focused equity mutual funds in May as a long market rally lost steam and the potential for interest rate hikes loomed. Data from LSEG Lipper indicates that domestic and global equity mutual funds investing primarily in Japanese stock markets saw outflows of US$7.2 billion, the highest in eight years.

This withdrawal indicates that investors are taking profits after a substantial run that lifted the benchmark Nikkei to record levels, with an approximate 30% gain over 17 months. The outflows suggest a waning enthusiasm for further investments, partly due to expectations of imminent interest rate hikes in Japan, possibly as soon as next month.

Martin Schulz, senior portfolio manager at Federated Hermes, commented that the Japanese market is likely to remain stagnant in the short to medium term following the surge in stock prices. He attributed the outflows to profit-taking and concerns over the domestic political climate, with recent surveys showing Prime Minister Fumio Kishida’s support at its lowest since he took office in 2021.

The Nomura NF Nikkei 225 ETF led the sell-off, experiencing outflows of US$2.07 billion. The Nomura NF TOPIX ETF and iShares MSCI Japan ETF followed, with withdrawals of US$1.28 billion and US$699 million, respectively.

Japan's Nikkei index hit record highs in March but has since entered a prolonged range below these peaks. The extended rally also left valuations less attractive. The MSCI Japan index trades at 15.4 times forward price-to-earnings (P/E), above its 10-year average of 14.1 and higher than the MSCI Asia Pacific's P/E of 14.03.

Kenneth Kim, senior investment analyst at Polaris Capital Management, observed a reallocation of funds across Asia, noting that the strong inflows to Japan seen in 2023 have slowed.

In contrast, Indian equity funds recorded inflows of US$2.41 billion in May, bringing the year-to-date total to US$24.65 billion. According to Lipper, Chinese equity funds received US$1.1 billion in the same month, with their year-to-date inflows reaching US$46.88 billion.