Other money managers are enjoying the ride.
"We have been positive on Japan since Abenomics began (in December 2012) and topped up holdings after the recent general election," said Paul O'Connor, London-based head of multiasset at Janus Henderson Investors. "For us, the election result reinforced the strategic bull case for Japanese stocks."
A number of elements are coming together to make Japan a unique opportunity. "Japanese equities offer a blend of characteristics that is hard to find in other major markets, such as corporate reform, booming profits, an attractive policy mix, political stability and reasonable valuations. In addition, it is a market that typically performs well when bond yields rise. That could be a useful characteristic in 2018," said Mr. O'Connor.
Janus Henderson is partly hedged on the currency. He said for an unhedged U.K. investor, Japanese equities have performed broadly in line with other markets since Mr. Abe came to power. But between 2012 and mid-2015, hedging the yen "would have substantially boosted returns, as the (Bank of Japan's) policies caused significant currency weakness," said Mr. O'Connor. Since then, a decision on currency has become less clear as fluctuations in sterling due to the U.K. vote to leave the European Union have "complicated the picture." Janus Henderson runs £722.9 million ($948.8 million) in Japanese equity.
J.P. Morgan Asset Management's Tim Woodhouse, a vice president and portfolio manager in the global equities team in New York, said the firm has increased allocations to Japan across its global opportunities and global focus strategies, moving from being a little underweight to overweight in the past year. He said the position is not something that is "particularly outsized," but a number of factors such as improving economic momentum, GDP picking up and a tighter labor market are in play. "The election didn't change things a huge amount … we felt fairly comfortable with the policies that were ongoing, but it is never unhelpful to have increased certainty," he said. J.P. Morgan runs $8 billion in Japanese equities across its global equities portfolios and an additional $15 billion in Japan equity strategies.
New York-based John Vail, chief global strategist at Nikko Asset Management, expects non-domestic managers to "likely accelerate their Japanese equities purchases even further as they remain heavily underweight," but see that the country is geared toward the global reflationary trend, which he said is "already being manifested in this earnings season ... although they have improved dramatically in the past four years, Japan's profit margins remain lower than most of the rest of the world, so when revenues increase, net profits tend to rise at a faster rate than countries with high profit margins." Mr. Vail said that, given the reflationary global outlook, "it is dangerous to ignore this fact."
While Abenomics initially attracted foreign investors for a couple of years, they then sold heavily. "Since then they have been moderate buyers overall, but with little interest during much of 2017," said Mr. Vail.
However, after last month's election, interest started to increase sharply. Nikko has $66 billion in Japanese equity assets under management.
The impact of currency is also an important consideration, added Mr. Woodhouse. "We have all seen the charts on the impact of the yen on Japanese corporate earnings; so again, you have to be very aware of what is happening to the yen." J.P. Morgan executives hedge currency back to the benchmark and do not take bets on it. "But (there is) absolutely no denying that if you don't understand the impacts of currency when forecasting around the earnings, then we are going to perform very poorly," he said.
