Retail Investors Could Be Drivers of Next Leg in Japan Equity Rally

In Japan, stocks are extending the bullishness accrued over the past couple months to start 2024. Some market observers believe that scenario can continue with contributions from the country’s retail investors.

That could be a positive signal for exchange traded funds such as the WisdomTree Japan Hedged Equity ETF (DXJ). Year-to-date, DXJ is higher by 21.21%, beating the S&P 500 by a margin of better than 2-to-1. The Bank of Japan seems a devoted fan of ETFs and institutional investors, propelling the rally by Japanese stocks.

Conversely, retail market participants haven’t been as active with Japanese equities. That’s par for the course, as those investors have long favored other asset classes due to the lengthy underperformance of stocks in their home country. After all, it took the Nikkei about three decades to reach and set new records.

Retail Investors Coming Off the Sidelines in Japan

Another recent note for the upside notched by DXJ and Japanese stocks is that Japan is finally experiencing much-needed inflation. The subsequent wage gains for workers there could catalyze the involvement of smaller investors with stocks.

Alongside such real income growth, the BOJ is likely to be looking for consumer surpluses to be allocated not to building up cash deposits, such as was the case during Japan’s ‘lost decades’, but to increasing their consumption. This would assist GDP growth and also put money to work in financial markets,” noted Naomi Fink, global strategist at Nikko Asset Management.

Increased consumer spending in Japan is pertinent to investors considering DXJ. The ETF allocates nearly 20% of its weight to consumer cyclical stocks – its second-largest sector exposure. More consumer spending would undoubtedly be positive for Japan’s GDP figures. Households can also make a legitimate impact on stocks there.

Many Japanese retail investors spent years accumulating cash, stashing it in low or no interest bonds or cash instruments through years of easy monetary policy by the BOJ. However, an inflationary environment won’t reward that strategy.

“Reflation provides a monetary incentive for households to participate in financial markets and to seek returns at least capable of keeping up with inflation,” added Fink.

She points out that reforms by the Nippon Individual Savings Account (NISA) that took effect at the start of this year provide tax breaks to retail investors. Therefore, this could compel those market participants to get involved with Japanese equities over the near-term.

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