Japan’s outward investment in equities surges to 6-year high

Amid global economic recovery.

The flow of Japan’s outward portfolio investment registered JPY 2.6trn in September, the biggest over more than one year.

In particular, outward investment in equities increased JPY 1.2trn in Sep, the highest over six years. In the first three quarters of this year, Japanese investors net bought a total of JPY 5.3trn foreign securities, a big reversal compared to the JPY 11.6trn sell-off during the same period of 2013.

According to DBS, superior growth performance and higher yields in foreign markets should have encouraged Japanese investors to put money abroad. Although the IMF has downgraded the global growth forecast during its latest economic outlook report, it doesn’t alter the fact that global economy is recovering and Japan is losing momentum. The IMF projects the global economy to grow a steady 3.3% in 2014 and pick up to 3.8% in 2015. Japan, by contrast, is expected to slow to 0.9% this year and 0.8% next year, down from 1.5% in 2013. The growth differentials between domestic and foreign markets are deteriorating.

DBS adds that the portfolio reallocation of Japanese pension funds should have also played a role in explaining the increase in Japan’s capital outflows. Under the JPY 127trn assets managed by the GPIF, the weight of foreign stocks and bonds has increased to 27% in Jun14 from 23% in Jun13, whilst the weight of domestic bonds has decreased to 53% from 60%. The adjustment of investment strategy by pension funds could be a long term process. Pressures are mounting for Japanese pension funds to enhance investment returns, given the rapid increase in their payout burden as a result of an aging population.