Introduction
Japanese equity funds experienced significant weekly outflows, marking the largest withdrawals in almost 18 years as investors reacted to recent market shifts.Context
For the week ending May 28, Japanese equity funds saw net outflows of $7.49 billion, the steepest decline since July 4, 2007, according to LSEG Lipper data. This trend appears to follow a common pattern where investors tend to buy during market dips, such as in April, and subsequently sell during recoveries, like the rebound seen in May.Developments
Analysts suggest that some of the outflows may also result from rebalancing efforts by Japan's large life insurance and pension companies, which often sell off rising stocks to purchase bonds in order to maintain asset ratios. Furthermore, the yen's 10% appreciation against the U.S. dollar this year poses a potential risk for export profitability, challenging the earnings outlook for many Japanese firms. Recent LSEG data has indicated a 1.8% downgrade in forward 12-month earnings estimates for these companies over the last month.Despite improvements in corporate governance, analysts like Herald van der Linde, head of equity strategy at Asia Pacific, believe that these changes are unlikely to serve as a near-term catalyst for growth. He emphasized that while reforms are in progress, their effects on profitability will take time, noting that Japan's return on equity (ROE) still lags behind other major markets.
The data also reveals that almost all outflows were driven by domestic investors, with $7.55 billion withdrawn from local funds, contrasting with the $59 million recorded in net inflows for foreign funds. The largest outflows during this period were identified in the Daiwa iFreeETF TOPIX, Nikko Listed Index Fund TOPIX, and Nomura NF TOPIX ETF, with redemptions of $2 billion, $1.92 billion, and $1.61 billion, respectively.