Japanese retail investors are shifting funds to the U.S. stock market despite strength in the domestic market. Japan's stock market has continued to rise on improved corporate earnings and policy expectations, but the flow of individual money is instead moving overseas.
On the 5th (local time), Bloomberg, compiling and analyzing data from Japan Exchange Group (JPX) and the Investment Trusts Association, Japan, reported that through November last year, Japanese retail investors recorded net sales of 3.8 trillion yen (about 3.5 trillion won) in investment trusts, a key investment vehicle for Japanese retail investors, related to Japanese stocks. That is the highest level in the past 10 years. Over the same period, the Tokyo Stock Price Index (TOPIX), Japan's benchmark, rose about 25%, a stark contrast.
By contrast, retail investors' interest in overseas stocks has remained high. Net purchases of overseas stocks through investment trusts did not fall much from the 2024 record high of 9.4 trillion yen (about 8.65 trillion won). This shows that Japanese retail investors see greater growth potential in overseas assets, especially U.S. stocks, than in domestic stocks.
A weak yen is cited as the backdrop for this flow of funds. As the yen has fallen, yen-based returns on dollar-denominated assets have increased, boosting the appeal of investing in overseas stocks, analysts said. Retail investors currently invested in U.S. stocks said they are feeling gains augmented by exchange-rate effects.
Ryohei Kobayashi, a retail investor focused on U.S. stocks, told Bloomberg, "I am investing most of my assets in U.S. stocks," and said, "The potential of large technology corporations leading the growth of artificial intelligence (AI) is still significant." Kobayashi added, "I judged that the U.S. market has structurally greater room for growth."
The outflow of funds is adding pressure on the yen to weaken. Although the Bank of Japan's rate-hike stance and the government's increased fiscal expenditure are proceeding in tandem, some said the outflow of retail money overseas is prolonging yen weakness. That runs counter to the Japanese government's policy direction of turning household savings into investments to channel funds to domestic corporations.
Adarsh Sinha, a strategist at BofA Securities, said, "The scale of retail outflows is unusual," and noted, "The Nippon Individual Savings Account (NISA), a tax-exempt small investment scheme introduced by the Japanese government, has encouraged increased investment in overseas stocks." He said, "This structure is one reason the yen's weakness is lasting longer than expected."
The market consensus is that Japan's stock market will remain firm this year. In yen terms, TOPIX is expected to show the largest relative outperformance against the S&P 500 since 2015. Even so, retail investors' attention remains fixed on the U.S. market.
On top of that, expectations for a weaker yen are reinforcing retail investors' preference for the U.S. market. Major financial institutions, including JPMorgan Chase and BNP Paribas, expect the yen could weaken to around 160 per dollar by the end of the year. Analysts say the roughly 2-percentage-point (p) gap in Government Bonds yields between the United States and Japan, and Japan's still-negative real interest rates after inflation, are fueling investor outflows.
However, if the rally led by U.S. tech stocks slows, the flow of funds could shift. Ishiguro Hideyuki, chief strategist at Nomura Asset Management, said, "Some retail investors are excessively concentrated in U.S. tech stocks," and noted, "In a market correction phase, portfolio vulnerabilities could surface." He added, "It is necessary to reassess asset allocation strategies this year."