Global Stock Rally Spurs Large Japanese Investors to Cash In

(Bloomberg) -- A sharp rebound in global equities after the Federal Reserve’s unprecedented stimulus in March has spurred the biggest shift in Japanese fund flows in seven years.

The Asian nation’s investors sold 3.91 trillion yen ($37.4 billion) of foreign shares in the six months ended Sept. 30, the latest balance-of-payments data showed, the most since 2013. They bought 11.8 trillion yen of local sovereign debt, also the biggest amount in seven years, according to figures from the Japan Securities Dealers Association.

The pivot reflects the twin themes of worries over a virus-devastated world economy and the prevalence of the 60/40 stocks-bond portfolio strategy that has come into question this year. Japanese funds cashed in on their equities portfolio after reaping a 27% return as a stimulus-fueled rally propelled global equities to a record high.

The selling was possibly driven by profit taking, said Kiyoshi Ishigane, the chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. Despite some progress in developing vaccines for the coronavirus, “there is still concern that the pandemic won’t come to an end anytime soon and that the world economy will have a second bottom.”

The biggest monthly withdrawal in stocks during the fiscal half occurred in July when banks dumped 4.85 trillion yen worth of holdings. Trust banks’ trust accounts, often seen as proxies for pension funds, were net sellers for four months through September while they stepped up purchases of overseas debt.

“Pension funds probably became overweight in overseas stocks due to higher equity prices,” said Shinichiro Kadota, Tokyo-based FX strategist at Barclays Securities Japan. “So the funds sold them and shifted to foreign bonds for passive portfolio rebalancing.”

Because the shift was still within foreign assets, it wasn’t a factor for yen appreciation, he said.

During this period, the S&P 500 Index and the MSCI World Index both gained about 30%. The behavior by Japanese funds may foreshadow a bigger global rebalancing shift in the last weeks of the year as stocks have continued to advance.

Balanced mutual funds, which control about $7 trillion of assets, may need to sell around $160 billion of stocks to revert to their targeted 60/40 allocation, according to a JPMorgan Chase & Co. report published Nov. 20 by analysts including Nikolaos Panigirtzoglou.

Institutional investors in Japan also offloaded 555 billion yen of local equities in the fiscal first half, the third six-month period where they are net sellers, according to exchange data.

For Japanese investors, a steeper yield curve also helped buoy demand for the nation’s sovereign bonds this year.

Yield premiums that Japan’s 30-year bonds offer over 10-year notes have more than doubled to about 60 basis points from a low of 24 basis points in March on the back of record debt-funded stimulus spending.

While yield curves globally have also steepened, Japanese purchases of overseas bonds almost halved to 4.19 trillion yen in the April-September period in favor of local debt.

European Bonds Are Losing a Big Fan as Japan’s Purchases Plunge

Japanese funds bought 7.88 trillion yen of super-long JGBs, or almost three times the purchases of intermediate notes or more than six times the investment in long bonds, according to figures from the JSDA for the six-month period.

Super-long bonds refer to debt with maturities of at least 15 years, while long bonds are notes with 10-year tenors.

©2020 Bloomberg L.P.