The sight of a bull may be on the horizon in the “Land of the Rising Sun” as Japan is now stepping into the fold as investors are eyeing the country for opportunities, especially after the latest sell-offs occurring in U.S. equities recently–a positive sign for capital inflows into the Direxion Daily Japan Bull 3X ETF (NYSEArca: JPNL).
“Wall Street has also outstripped the rest of the world by a stunning margin in performance terms this year, a divergence that has worried investors in recent weeks and spurred some rotation away from US equities and towards Japan and other markets,” said Michael Mackenzie of the Financial Times.
The 800-point loss in the Dow Jones Industrial Average had many investors fretting about whether the historic bull market seen in U.S. equities has finally run out of steam. As such, investors may be looking abroad for strength and that could come in the form of investments in Japan as a value play.
“Japan is one of the cheaper markets in our valuation composite,” said Binay Chandgothia of Principal Global Investors. ”
Along with a rise in its own stock market and government support for economic growth, Chad Morganlander, portfolio manager at Washington Crossing Advisors, sees these factors coming into play to spur a bull market in Japan.
“You have an accommodative monetary policy, a continuation of a fiscal push, or fiscal stimulus, you have GDP expectations that are now being revised higher so these are all tail winds for the Japanese market,” Morganlander told CNBC’s “Trading Nation” on Tuesday.
Bi-Lateral Trade Negotiations with U.S.
Last month, Japanese Prime Minister Shinzo Abe and U.S. President Donald Trump met in New York as part of ongoing trade dialogues between the two countries. In the end, Japan agreed to bilateral trade negotiations after initially refuting such communication.
By agreeing to open trade negotiations, Japan was precluded from looming auto tariffs and American officials acquiesced to Japan’s request to not go further than its previous commitments in a multilateral trade deal known as the Trans-Pacific Partnership, allowing it to open its markets for agricultural and forestry imports from the United States.
Even if no tangible trade agreements between the two nations have materialized just yet, it prolongs Japan’s involvement in any trade wars with the U.S. as opposed to the situation with China.
“I think the Japanese government’s attitude is not to be confrontational and appear to get along, but just basically bide its time,” said Takuji Okubo, managing director and chief economist at Japan Macro Advisors. “Just by agreeing to negotiate, I don’t think the Japanese government conceded anything.”
Related: Japan ETFs Brush Off Escalating Trade War Fears
Risk-On for Japanese Bond Investors
The risk-on mentality that is prevalent in a bull market can be seen in Japanese fixed-income investors who have been flocking to Chinese bonds in order to appease a growing hunger for high-yield as access to these areas of the $12 trillion Chinese bond markets have opened due to recent reforms. Data provided by the Japanese Ministry of Finance revealed that Japanese investors purchased 151 billion yen ($1.33 billion) of Chinese bonds year-to-date, which is close to double the amount invested in 2016.
“A growing number of investors are interested in Chinese bonds now,” said Hiroshi Yokotani, portfolio strategist at State Street Global Advisors. “The biggest attraction is their relatively high yield.”
In addition to the higher yields offered by Chinese bonds, China’s latest policy changes have provided the necessary ingress to allow more Japanese investors and investors across the globe to take part in the high-yielding bond bonanza.
“China’s policy stance on markets is becoming very open, which we take very positively. And the speed of their market reforms is quite fast, compared to other countries,” said Koichi Matsumoto, general manager of global fixed income investment.
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