The "neglected" Japanese stocks are rising, and foreign capital is pouring in

Due to the withdrawal of risk-averse funds from the United States, a better-than-expected Japan-U.S. tariff agreement, and a significant increase in market confidence regarding "corporate governance reform," Japanese stocks have experienced a "ninja-style" rebound.

As of Tuesday's close, although the Tokyo Stock Exchange index has retreated about 1% this week, it has surged over 34% since the low on April 7, and on August 8, it broke through the 3000-point mark for the first time, becoming one of the best-performing major stock indices globally, significantly outperforming the 19.5% increase of the European Stoxx 600 index and the 33% increase of the U.S. S&P 500 index.

The starting point of the market can be traced back to early April this year. According to CCTV News, on April 2 local time, Trump signed two executive orders regarding the so-called "reciprocal tariffs" at the White House, announcing that the U.S. would establish a 10% "minimum benchmark tariff" on trade partners and impose higher tariffs on certain trade partners.

Trump reignited the tariff storm, causing panic in global markets, but subsequently, the rapid conclusion of a trade agreement between the U.S. and Japan greatly alleviated the pressure on Japan's export-oriented companies, injecting confidence into the market and ultimately driving the Tokyo Stock Exchange index upward, successfully surpassing the 3000-point mark in August.

According to CCTV News, the U.S. and Japan reached an agreement on tariffs. According to the agreement, the U.S. will impose a uniform 15% tariff on Japanese goods, including automobiles, which is lower than the 25% tariff rate previously threatened by Trump. In exchange, Japan has committed to establishing a fund of up to $550 billion for direct investment in the U.S., with investment directions to be led by the U.S. side.

Foreign capital is returning in large amounts, and household funds are also beginning to awaken

From a funding perspective, the recent rise in Japanese stocks is not driven by a specific type of capital, but rather by the participation of multiple parties.

Neil Newman, a strategist at Astris Advisory Japan, stated that this rise in Japanese stocks is fundamentally different from the "export stock-led short-term surge" in 2024. This time, foreign capital, local Japanese institutions, and retail investors are all entering the market simultaneously.

Data shows that foreign capital has continued to net inflow since the "equal tariffs" in early April, with a cumulative purchase of up to $35.7 billion in Japanese stocks to date, as top global funds, including Bridgewater, have adjusted their allocations to Japanese stocks.

Bruce Kirk, a strategist at Goldman Sachs Japan, noted that the surge in the Tokyo Stock Exchange Index is a prime example of a rebound led by non-Japanese investors. The nearly continuous net inflow of foreign capital over the past few months has been the key force driving this "ninja-style invisible rebound" since April.

At the same time, Japanese household investments have quietly shifted towards the stock market. The Japanese government's expansion of the NISA tax-exempt investment account coverage in 2024 has sparked residents' interest in allocating stocks. By the end of last year, Japanese households held over $14 trillion in financial assets, with half still sitting in cash or deposits.

Joshua Crabb, head of equities for Robeco Asia Pacific, pointed out that with inflation returning and wages rising for the first time in thirty years, Japanese savers now have reasons to readjust their asset allocation:

"If people believe Japan has bid farewell to deflation, a large amount of funds originally allocated to bonds and cash are likely to flow into the stock market."

"The Japanese economy may not experience a significant leap, but will there be a major change in the asset allocation of Japanese people after inflation returns? The answer is yes."

Corporate Governance Reforms Yield Results, Valuation Logic Reshaped

In terms of valuation, the overall price-to-earnings ratio of the Japanese market is currently approaching the "tolerable upper limit" for investors, but Jefferies strategist Shrikant Kale believes that as the structure of Japanese companies continues to optimize, this "valuation upper limit" is also being redefined.

Charlie Linton, an investment manager at Ninety One Asia Pacific, noted that Japan's corporate governance reforms began in 2012, but only truly started to take effect after the Tokyo Stock Exchange launched its "public naming" policy in 2023. Companies that do not meet governance standards are listed, and this mandatory mechanism forces reforms to take place, allowing some "sleeping value" to be re-recognized by the market.

Oleg Kapinos from Asset Management One, a Japanese asset management institution, stated that the trend of corporate governance reform will continue in the long term.

Some investors have indicated that if Japanese companies can focus on their most profitable businesses, the industrial stocks within their vast assets will contain significant opportunities. For example, Japan's largest defense contractor, Mitsubishi Heavy Industries, saw its stock price rise nearly 70% this year, as the market expects it to benefit from increased defense spending and improved management efficiency.

As emphasized by institutions such as Jefferies and Ninety One, although the Japanese economy has not entered a phase of "explosive growth," changes on the asset side are sufficient to drive a re-rating of the market