Japanese Stocks, Bonds See Record April Inflow as Investors Flee U.S. Market

In April, investors fled the U.S. market, leading to a record inflow of foreign funds into Japanese stocks and long-term bonds. The net purchase of 821 billion yen (5.66 billion USD) by overseas investors marked the highest single-month inflow since the Japanese Ministry of Finance began tracking the data in 1996. This shift was driven by the trade offensive launched by Donald Trump, which prompted investors to seek safer havens.

The significant inflow of funds into Japanese assets was largely driven by institutional investors, including pension funds and asset management companies. These investors were attracted to Japan's reputation as a traditional safe-haven asset, especially as the "sell-off U.S." narrative gained traction in April. The inflow was particularly notable in the first week of April, following Trump's announcement of "reciprocal" tariffs. This announcement led to a surge in U.S. 10-year Treasury yields while Japanese 10-year bond yields declined, making Japanese assets more attractive.

Despite the initial sell-off in global stock markets following Trump's tariff announcement, the Japanese Nikkei 225 index managed to rise by over 1% in April, while the S&P 500 index fell by nearly 1%. This performance further highlighted the appeal of Japanese assets during a period of heightened uncertainty. The inflow of funds was primarily driven by institutional investors, with pension funds and asset management companies actively purchasing Japanese stocks, and foreign exchange reserve management agencies, life insurance companies, and pension funds leading the buying of Japanese bonds.

Looking ahead, the outlook for Japanese assets remains positive. While the historic single-month inflow may not be sustainable, market observers expect the strong inflow of funds to continue. The ongoing trade negotiations and the potential for further agreements between the U.S. and other countries are likely to support this trend. Additionally, reforms in corporate governance at the Tokyo Stock Exchange, which prioritize shareholder returns, are expected to further enhance the attractiveness of Japanese stocks. These reforms, which require companies with a market-to-book ratio of less than 1 to "comply or explain," aim to increase the appeal of Japanese companies to both domestic and foreign investors. The reforms are also expected to drive record stock buybacks, boosting earnings per share and supporting stock prices.

Despite the partial rebound of the U.S. dollar following the sell-off in April, the expectation of further dollar weakness and yen strength makes investing in the Japanese stock market logical, especially as the Japanese economy shows signs of recovery. This trend is expected to continue, with Japan likely to attract significant inflows of funds in the coming months. However, while the net inflow into Japanese stocks is expected to exceed the levels of the past decade, the net inflow into Japanese government bonds may not reach the levels seen during the period of negative interest rates implemented by the Bank of Japan, as some of the arbitrage opportunities available to foreign investors at that time no longer exist.