Sunday, November 25, 2007

Japanese Mutual Fund Industry

While investors remained focused on the influence that foreign buying was having on Japanese stock prices, the number of individual investors was actually rapidly rising, from 15 million in 1990 to nearly 40 million today.

Given the recovery in stock prices, Japan’s investment trust (mutual fund industry) has come roaring back, with total assets in publicly offered investment trusts now at a new historical high of just under JPY50 trillion, while the balance of stock funds is still 13% below the 1989 peak at just under JPY20 trillion?even as stock prices remain at only half of what they were at the December 1989 peak.

Like what was seen in the U.S. during the 1980s and 1990s, TJI continues to see the potential for a Japan version of "the greatest financial story ever told", i.e., a continued structural shift in Japan’s personal financial assets over the next decade.

If the exposure to investment trusts and equities in Japanese personal financial assets rises to levels similar to the share in US personal financial assets, it will represent a potential inflow into Japanese stocks of over JPY300 trillion, or fully half of current market capitalization. In addition, Japanese financial institutions have largely completed their house cleaning of losing positions in their stock portfolios, and are again beginning to accumulate stocks.

Consequently, as was seen during the rally between October of 2005 and in the first quarter of 2006, the influence of foreign buying on stock prices is being diluted by net positive fund flows into stocks by domestic investors (as opposed to day traders buying stocks on margin).


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