For global equity investors and Shinzo Abe, it's splitsville.
Starting in the first days of 2016, foreign traders have been pulling out of Tokyo's stock market for 13 straight weeks, the longest stretch since 1998. Overseas investors dumped $46-billion (U.S.) of shares as economic reports deteriorated, stimulus from the Bank of Japan backfired and the yen's surge pressured exporters. The benchmark Topix index is down 17 per cent in 2016, the world's steepest declines behind Italy.
Losing the faith of foreigners would be a blow to the Japanese prime minister - they're the most active traders in a market Mr. Abe has held up as a litmus on his growth strategies. "Japan is back," and "Buy my Abenomics!" he proclaimed during a visit to the New York Stock Exchange in September 2013, when shares were marching to an eight-year high. Now about half of those gains are gone and BlackRock Inc., the world's largest money manager, is among firms ending bullish calls on Japan equities.
"Japan has been disappointing," said Nader Naeimi, Sydney-based head of dynamic markets at AMP Capital Investors Ltd., which oversees about $115-billion. He's a long-time fan of Tokyo equities who says he's now looking for opportunities to sell. "A lot of people are starting to doubt Abenomics."
While markets elsewhere are climbing back from a global sell-off, investors in Japan see fewer reasons for optimism. Growing concern that Abenomics - the three-pronged strategy of fiscal and monetary stimulus and structural reform - is falling flat has spurred speculation the nation will slip into deflation, setting back efforts to end three decades of malaise.
Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui Asset Management Co., fears a downward spiral. Foreigners are needed to boost the stock market, and if equities don't rise the public will lose confidence and curb spending, as he sees it. That could send Japan back into deflation. "If foreigners don't come back, the future of Abenomics could be jeopardized," he said.
Overseas investors, which account for about 70 per cent of the value traded in Tokyo shares, bought a net 18.5-trillion yen between 2012 and 2015. Global fund managers, which were negative on Japanese shares for almost all of the five years before Mr. Abe came to power, have been overweight every month since, according to a Bank of America Corp. Merrill Lynch survey.
Now that bullishness is dissipating. Overweight positions on Japanese stocks fell for a third straight month in March, with investors' outlook on the economy dimming and concern over earnings growing, the Merrill Lynch survey showed. They've sold a net 5-trillion yen since the second week of January, the longest stretch since 16 weeks of selling in 1998 and the most in records going back to 1993.
Citigroup Inc. was the latest to cut its outlook on Japanese shares on Thursday, joining Credit Suisse Group AG and BlackRock in voicing disappointment. LGT Capital Partners, a Switzerland-based $50-billion asset manager, last week retired its "Japan's Resurgence" strategy, citing declining optimism that Abe's attempts to spur inflation will succeed.
BlackRock cut its outlook on Japan from overweight to neutral, citing the stronger yen's risk to exporter earnings and increased volatility as reasons. Dan Chamby, who oversees the $47 billion BlackRock Global Allocation Fund, said in February that while he's still bullish on Japan, wild market swings meant he had to reduce his allocation to the Asian nation's equities as his fund's goal is to provide competitive returns with less volatility.
The Topix index dropped 0.6 per cent at the close of trading in Tokyo.
What's helped other equities markets has been hurting Japan. The Federal Reserve's cautious tone on interest rates erased the year's losses in the Standard & Poor's 500 Index, but it also weakened the dollar and pushed up the yen. Meanwhile, concerns about global growth also sent investors to the safety of Japan's currency, which is trading at the strongest level since October 2014.
The impact on profits could be severe. Masahiro Suzuki, analyst at Daiwa Securities Group Inc., says earnings, which likely posted double-digit growth last quarter, will fall by almost 10 per cent in the three months ending in June.
Exporters Toyota Motor Corp., Honda Motor Co. and Fuji Heavy Industries Ltd., which had helped propel the Topix to last year's high, are among the biggest drags on the gauge this year. Bank shares are also still reeling from the damage caused by the BOJ's decision in January to adopt negative interest rates. They're down the most among the Topix's 33 groups, tumbling 35 per cent.
"The scenario investors had in mind has gone awry," said Yoshihiro Ito, chief strategist at Okasan Online Securities Co. "Flagship companies like Toyota aren't doing well. Abenomics, as represented in Japanese stocks, has gone."
The economy is also signalling cause for concern. Abenomics got off to a good start, with consumer prices steadily rising toward the BOJ's 2 percent goal until mid-2014. There is now little sign of inflationary pressure in Japan. Prices in February didn't rise, wage growth is slow and the economy contracted last quarter. Hitoshi Ishiyama, chief strategist at Sumitomo Mitsui in Tokyo, estimates core CPI will be zero or negative from March.
"We're about to see a world where everything achieved through the BOJ's easing will vanish," Mr. Ishiyama said. "The lack of trust in Abenomics, zero results from the BOJ's stimulus, risks of sliding profits from a stronger yen -- it's not surprising foreign investors will want to re-evaluate their investments in Japanese stocks."