Chinese investors fuel Nikkei 225 bull run, pour US$215 million into ETFs tracking Japanese stocks

“As we look forward to 2024, our medium and longer term outlooks for Japanese equities remain very positive, driven by the two key themes of corporate governance improvement and the shift to inflation from deflation,” Lazard Asset Management, a global money manager that oversees US$193.6 billion in assets, said in a strategy report this week.

“We would view a near term market pullback in Japan as an opportunity.”

In a sign of how frantic the trade is, daily turnovers of five index-based ETFs tracking Japanese stocks issued by Chinese mutual-fund firms have jumped to multi-year highs. The fund prices’ hefty premiums on their net asset values have prompted money managers to warn of potential investment risks.

The buying binge has driven the size of these five funds to 1.54 billion yuan (US$215 million), according to Bloomberg data.

Take the China AMC Nikkei 225 ETF, the biggest among the five funds, for example. Units worth 536 million yuan changed hands on the Shanghai exchange on Thursday, rising to a record high for a third straight day and by almost 10 times its average daily turnover last year. The fund rose 0.7 per cent to 1.456 yuan on Friday, commanding a 11 per cent premium on its net asset value for the biggest gap since May last year, according to Bloomberg data.

Chinese traders are not alone in loading up on Japanese stocks. Global net inflows into Japanese shares amounted to 67.3 billion yen (US$464.3 million) in December, taking the full-year inflows in 2023 to 820.4 billion yen, according to US research firm Morningstar.

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About 3,000 companies worth US$6.9 trillion are listed on the Tokyo Stock Exchange, making it the largest in Asia in terms of market capitalisation, according to Bloomberg data. Its three biggest stocks are Toyota Motor, Sony Group and phone carrier Nippon Telegraph and Telephone. However, Japan’s stock market, which comprises the Tokyo and Osaka exchanges and the Tokyo Commodity Exchange, is ranked second in the region behind China, which has three bourses and is capitalised at US$9.1 trillion.

The Nikkei 225 rose for a fifth straight day on Friday, pushing a technical indicator past a level suggesting shares are overbought.

China Asset Management, which manages the China AMC Nikkei 225 ETF, reminded investors in a statement on Friday of the risks arising from the fund’s trading price premium in the secondary market, and warned that blind investing might incur big losses.

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Some investors, however, believe that the run-up in Japanese stocks still has legs. Beyond inflation, a weaker yen is adding to the upbeat mood.

A weakening local currency bolsters the prospects of corporate earnings, as Japanese companies derive a big chunk of their sales from overseas markets. Revenue denominated in foreign currencies will translate into higher profits in terms of the yen, if the exchange rate remains depressed.

The yen has resumed its depreciation against the US dollar since a magnitude 7.6 earthquake struck Japan’s northwest coast on New Year’s Day, reducing the likelihood of the Japanese central bank calling time on negative interest rates any time soon. The Japanese currency recently traded at around 145 against the US dollar, its lowest level in almost five weeks. It dropped to 151.72 in November, its weakest level against the dollar in 33 years.

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“The sustainability of the current bullish tone is largely more dependent on the inflation situation in Japan rather than a weaker Japanese yen,” said Kelvin Wong, an analyst at Oanda.

“A clear path of an exit from a 20-year-plus deflationary environment is likely to lend support to another potential major uptrend phase in the Japanese stock market.”