(April 1, 2014) — The largest investors in Japan have started to shed their domestic equity holdings, hurting Prime Minister Shinzo Abe’s plans for their capital to help the country’s economy recover.
Last week, Reuters reported these pension funds, which have more than $170 billion in combined assets, had started selling their equity holdings before the end of the tax year, which begins today.
Yesterday these investors continued the pattern, the news agency reported, citing sources within the country’s financial markets who were concerned they were moving too fast, too soon to fit with a scheduled retreat from relatively risky assets.
The start of the tax year brings reforms for corporate pension plans that are designed to sharpen up their investment strategies and get them in to good health. They have been given five years to improve or close.
Despite equity markets sinking over recent months—in the first quarter of the year, the Nikkei lost 9%—these investors still decided to sell, market participants said.
“Trust banks tend to buy for rebalancing when the market is down. So we need to think something abnormal was happening,” Kenji Shiomura, senior strategist at Daiwa Securities told Reuters. “It’s likely to be pension funds’ selling. We could see more such selling in coming weeks.”
Between March 10 and March 20, the Nikkei fell by almost 6%. The index of Japan’s leading stocks has since rallied, but remains around two percentage points lower than at the start of the month.
These moves could be damaging for the Japanese Prime Minister’s plan to shore up the country’s equity markets with pension cash. Moving large amounts of capital into the Nikkei should provide a boost that would attract other investors.
However, data monitor EPFR said the Nikkei’s positive bump last week failed to fuel investor appetite, resulting in outflows from Japanese equity funds.
Taku Arai, product manager in Japanese Equities, at Schroders, remained unruffled by recent stock market movements.
“Japan’s encouraging inflation readings and employment data last week showed further evidence of the country’s improving economic trend and its progress in combating deflation,” said Arai. “While there are still concerns about the fading effect of yen weakness last year and slower demand due to a consumption tax hike from April 1, we remain positive on Japan’s longer term structural trends, namely an exit from deflation, a tightening labour market, and recovering levels of corporate spending.”
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