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Rising tensions over North Korea’s nuclear weapons development programme dented investor enthusiasm towards Japan, even before the reclusive regime fired a ballistic missile over the Japanese island of Hokkaido and into the Pacific Ocean last week.
The net percentage of institutional investors holding an overweight position in Japanese equities tumbled from 20 to 12 per cent from the previous month, according to a poll conducted in the first week of September by Bank of America Merrill Lynch.
But valuations for Japanese equities are not the issue of concern.
A net 23 per cent of those surveyed in September said Japanese equities were undervalued, up from 14 per cent in the previous month’s poll.
Michael Hartnett, chief investment strategist at BofAML, said that fear of a conflict involving North Korea had developed into the top “tail risk” of concern for investors by a wide margin, a finding that tallied with the reduction in Japanese equity exposure by fund managers.
Shinzo Abe, Japan’s prime minister, immediately condemned the missile test as outrageous and emphasised that UN sanctions on North Korea needed to be imposed firmly.
In spite of the tensions over North Korea, Japan’s benchmark Nikkei 225 index rose 3.2 per cent last week, taking its gain so far this year to 4.2 per cent.
Heavy buying of exchange traded funds by Japan’s central bank as part of the government’s programme to stimulate economic growth continues to provide support for the stock market. Inflows into Japanese-listed ETFs were $9.3bn in August, taking inflows for the year to date to $42bn.
But the headwinds facing Japanese equities appear to be increasing. Earnings per share growth for the Japanese stock market is projected to decline from 16.7 per cent in 2017 to 8.1 per cent next year, according to Société Générale, the French bank.