The surge has been led by foreign investment, as cumulative net weekly flows into Japanese equities by foreign investors since the start of 2012 reached ¥5.9 trillion ($41.1 billion) year-to-date after a steady decline from its 2015 peak, according to the BlackRock Investment Institute.
Cumulative net flows from foreign investors into Japanese equities reached a peak in mid-2015 with ¥25.1 trillion of inflows, but fell consistently throughout the years, hitting a low of ¥2.9 trillion in outflows by the end of March this year, according to BlackRock data.
Despite compelling numbers relative to history, investors are split on whether the current surge marks the start of a long-term trend, or are another short-term, tactical play. What sources did agree on, however, was that significant improvements in governance among Japanese corporates can only be a positive thing.
BlackRock Inc., with $9.09 trillion in assets under management, wrote in a June 26 commentary that it was rethinking its modest underweight on Japanese stocks due to a more shareholder-friendly approach from Japanese companies and a loose monetary policy.
Additionally, T. Rowe Price Group, which has $1.35 trillion in AUM, is holding firm to its five-year capital markets assumption that Japanese equities will return 9.2% on an annualized basis, which is on a par with its forecast for overall developed markets equities.
But unlike in other developed markets, investors have welcomed Japan's accommodative monetary policy as the country has struggled with economic growth over the past three decades, with GDP growth and inflation often dipping into negative territory.
The Bank of Japan is the last central bank to hold onto unconventional monetary policy of negative interest rates, and T. Rowe Price executives are not expecting them to change their interest rate policy, said Thomas Poullaouec, head of multiasset solutions, Asia-Pacific, in Singapore.
The BOJ kept its benchmark interest rate at -0.1% even as inflation reached a 42-year high of 4.3% in January, although it did relax its yield curve control policy by widening the tolerance band of its 10-year government bond yield. The inflation rate moderated to 3.2% in May.
In addition, the earnings growth potential driven by a corporate governance focus and "the use of cash by companies are really the key pillars of our overweight," Mr. Poullaouec said.
The Tokyo Stock Exchange has called for better disclosures and shareholder returns from companies, particularly those trading below book value, prompting an increase in cash spending on share buybacks and business growth.
"There's really been an improvement in dividend payout, which is now higher than in the U.S., and we have also seen a high level of share buybacks compared to other markets," Mr. Poullaouec added. Dividend payouts by Japanese companies are expected to reach a record high of ¥15.2 trillion by March 2024, ¥100 billion more than the year prior, according to a Nikkei Inc. analysis.