2023 has arguably marked a turning point for Japan, according to the latest issue of The Cerulli Edge―European Monthly Product Trends. Domestically, GDP growth has been relatively strong and rising inflation has signaled a change in the country’s economic fortunes. Internationally, the fact that Japanese inflation has still lagged levels seen elsewhere in the developed world—and therefore not yet triggered the Bank of Japan to raise interest rates—has meant a weaker yen and greater price competitiveness of exports, as well as greater opportunities for foreign investment.

Greater emphasis on improving corporate governance in Japan is reinforcing the rising appeal of the country’s stocks. The market has also been buoyed by the pledge of JPX, the owner of the Tokyo Stock Exchange, to support measures that improve shareholder value. Last year, the exchange implemented more stringent listing standards designed to encourage foreign investment into the top-tier market, the TSE Prime.

These developments appear to be reflected in fund flows. Japan equity fund flows in Europe turned net positive in April, registering €500 million (US$561 million) of net new money across mutual funds and exchange-traded funds (ETFs).¹

In May, Japan was the second-best equity sector for net new flows, behind global equity large cap. Active Japan equity funds took in €2.3 billion, while passive flows trailed at €400 million.² The Japan equity sector saw net inflows of €4.2 billion into actively managed products across May and June, compared to €900 million into passive products.

At the start of 2023, 145 asset managers expressed mixed views about the demand potential of Japan equity funds. “Around a fifth of our managers included Japan in their top three equity sectors for future demand for active and index mutual funds (19% and 20% respectively); 29% did so for ETFs,” says Fabrizio Zumbo, director of wealth management research in Europe.

Nevertheless, managers are considerably more bullish about the global equity, global emerging market, and China equity sectors, according to the research. As a point of comparison, a third (34%) expect China to be one of the most in-demand equity sectors in the active fund space for 2023–2024.

Yet Chinese equity funds experienced net outflows in May and June, while rising stock prices in Japan started to attract the attention of foreign investors. The Nikkei 225 was up 27% in the first half of 2023, making it the second-best performer of the major market indices for the six-month period, not far behind the Nasdaq.

¹ Source: Morningstar

² Source: Morningstar