After three months, the Japanese stock market has finally regained its upward momentum. The Nikkei 225 index broke through the 40,000-point mark again on Tuesday, and the TOPIX index also reached a 34-year high last week.
On Wednesday, Japanese stocks continued to rebound. The Nikkei 225 index closed up 1.3%, while the TOPIX index rose by 0.5%. Over the past 5 trading days, the two major indexes have accumulated gains of 3.3% and 2.8% respectively.
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Behind the rebound of Japanese stocks, both foreign investors and retail investors have set historical records in terms of shareholding. On one hand, due to the positive outlook following the end of deflation, loose monetary policies, and improvements in corporate governance, a large amount of overseas funds have flowed into Japan. On the other hand, the significant previous rise in Japanese stocks has greatly boosted public confidence, and stock splits by listed companies have also lowered the threshold for retail investors to enter the market.
Japanese-related ETFs have also seen a large influx of funds, with a collective surge last week. However, due to the sharp depreciation of the Japanese yen, some ETFs without hedging against exchange rate risks have underperformed the market.
<h2>Record Shareholding by Foreign and Retail Investors in Japanese Stocks</h2>
A survey released by the Tokyo Stock Exchange on Tuesday showed that the number of individual shareholders of companies listed on the four major stock exchanges in Japan in the 2023 fiscal year increased by 4.62 million from the previous year, reaching a record high of 74.45 million.
The increase in the number of retail investors is not only stimulated by the rise in stock prices. Companies like Nippon Telegraph and Telephone Corporation (NTT) implemented stock splits, leading to a decrease in the price per share, making it easier for individuals to purchase stocks.
The survey also revealed that about 2.47 million individuals became new shareholders of companies that implemented stock splits, including 1.06 million new shareholders in NTT (which underwent a 25:1 stock split), as well as approximately 110,000 new individual shareholders each in Tokyo Disneyland operator Oriental Land and trading company Mitsubishi Corporation.
Furthermore, the new version of the Japanese Individual Savings Account (NISA) tax-exempt plan implemented in January this year has also contributed to the increase in the number of individual investors. This plan is targeted at small investors.
While the number of domestic retail investors has surged, the proportion of Japanese stocks held by foreign investors climbed to a historic high last year.
Data released by the Japan Exchange Group on Tuesday showed that by the end of the fiscal year ending in March, the total value of stocks held by foreign investors accounted for 31.8%, the highest level since comparable data has been available since 1970. In 1970, this proportion was only 4.9%. Individual investors accounted for 16.9%, while financial institutions accounted for 28.9%.
Moreover, in the previous fiscal year, foreign investors increased their purchases to 320 trillion yen (2 trillion U.S. dollars), a growth of over 40% from a year ago. They became net buyers for the first time in three years, with a cumulative net purchase of 7.7 trillion yen.
<h2>Why is there such a large disparity in returns for Japanese stock ETFs?</h2>
In line with the rise in the overall market, a significant amount of funds flowed into exchange-traded funds (ETFs) focusing on Japan last week, with a collective increase of over 2%.
Among them, the iShares MSCI Japan EUR Hedged UCITS ETF (IJPE) saw a cumulative increase of 3.44% last week, while the Amundi MSCI Japan ESG Climate Net Zero Emissions Target CTB UCITS ETF (CJ1P) rose by 2.42%. Both ETFs benefited from the market rally, reduced volatility, and positive outlook brought about by stabilizing inflation.
However, it is worth noting that despite the clear increase in Japan-related ETFs, there is a significant performance gap.
Taking BlackRock's iShares EWJ and HEWJ as examples. In the past year, Japanese stocks have risen by around 20%, with EWJ returning approximately 10% during the same period, and HEWJ returning around 30%.
Some analysts believe that currency hedging is the main reason for the performance differentiation of ETFs. EWJ tracks the MSCI Japan Index, with its holdings mainly consisting of Japanese company stocks, while HEWJ is the currency-hedged version of EWJ, with over 90% of its holdings being EWJ, along with holdings in US dollar cash, yen-to-dollar forward contracts, and US dollar money market funds.
Due to the high US dollar interest rates and the slow pace of yen rate hikes, there is a significant interest rate differential between the US and Japan. In the past year, the yen has fallen by over 12% against the US dollar, dropping below the 160 level last week to hit a new low since December 1986. As of the time of writing, the yen-to-dollar exchange rate is trading at a lower level of 161.79.
Therefore, if ETFs do not hedge against currency fluctuations, a sharp decline in the yen could significantly offset the gains from the rise in Japanese stocks

Japanese-related ETFs have also seen a large influx of funds, but due to the sharp depreciation of the Japanese yen, some unhedged ETFs have underperformed the market

Japanese stocks regain momentum, with the Nikkei 225 surpassing 40,000 points, setting record highs for both foreign investors and retail investors