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Global investors are cautious about once-favorite Japanese stocks

(Bloomberg) — Japan’s stock market’s record rally earlier this year seems a distant memory as foreign investors sell off their stocks in a sluggish economy.

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Citigroup Inc. and abrdn Plc are among banks that have become more pessimistic on the country’s stocks as the outlook for the Bank of Japan’s corporate governance reform and monetary policy remains uncertain. A survey of fund managers at Bank of America Corp. found that about a third of respondents believe the market has peaked.

Foreign investors, who just a few months ago helped lift Japanese stocks to record highs and beat foreign rivals, became net sellers for the fourth straight week through June 14. That was the longest streak since September, according to data from the Tokyo Stock Exchange.

Japan’s Nikkei 225 index has stalled since hitting a record high on March 22. Since then, it has fallen 5.6%, compared with a 1% rise over the period for the MSCI AC Asia Pacific Index, and a 4.4% rise in the index. the rising US S&P 500 index.

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“Early optimism for Japanese stocks this year is clearly hitting a speed bump,” said Hebe Chen, analyst at IG Markets Ltd. “Investors are faced with the profound question of whether the drivers of Japanese equities are sustainable.”

Foreigners sell

Factors that previously supported Japanese stocks are starting to hinder the market. Foreign investors who flooded in, attracted by Japan’s unprecedented drive to improve shareholder value, are now selling, shedding a net ¥250 billion ($1.6 billion) worth of Japanese stocks in the week ended June 14, according to data from TSE.

Japanese stocks face “material correction risk,” and it will likely take some time for positive factors to emerge, said Citigroup analysts including Ryota Sakagami.

Weak yen

Investors are growing wary of the yen’s relentless decline. In the past, they have welcomed the weak currency as a boon to exporters, but the extent of the yen’s recent decline has highlighted how it could hurt Japan’s economy, including by increasing inflationary pressures.

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The yen depreciated to nearly 160 per dollar on Friday, a level not reached since April. This prompted Japanese currency officials to warn against excessive exchange rate movements.

“We would like to see some bottom in terms of the weakening trend” of the yen, and that could benefit the domestic economy, Aisa Ogoshi of JPMorgan Asset Management told Bloomberg TV.

Despite the recent sluggishness in stock prices, several strategists, including those at BlackRock Inc., continue to invest. and Morgan Stanley, positive on the long-term prospects for Japan, citing structural changes including corporate reforms, domestic investment and wage growth.

BOJ Outlook

Investors will be closely watching whether the BoJ goes ahead with its second rate hike in July, after raising rates for the first time since 2007 in March. The Topix index for banks is up 30% this year, about double the gain of the overall Topix index, on expectations that rising borrowing costs will help financial firms improve their lending margins.

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But bets that the BOJ would slowly raise rates have weighed heavily on lenders recently, with the banking index down 5.2% this month, compared with a 1.7% decline in the Topix. The monetary authority surprised market players earlier this month by postponing until July the publication of a plan to reduce bond purchases. Swap rates indicate that the probability of a rate hike in July has fallen from about 66% at the beginning of the month to about 28%.

Edinburgh-based abrdn Plc favors Chinese and Indian stocks over their Japanese counterparts in the next three to six months, said David Zhou, multi-asset and investment director.

The company predicts that the right policy steps would help the two emerging markets attract financial flows, Zhou said in an interview. As for Japan, foreign investors will likely need to see more progress on corporate governance reform before they can add much, he said.

–With help from Masaki Kondo.

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