A market-friendly central bank
While the Federal Reserve (the Fed) will likely begin raising rates later this year, the Bank of Japan (or BOJ) remains in easing mode and is planning to continue to expand its balance sheet, providing a potential tailwind to the country’s stocks.
Increased equity buying by institutions
The Japanese market has benefited from the GPIF and other institutional buyers increasing their investments in Japanese equities. While the GPIF rebalance is almost complete—the fund will likely reach its target allocation of 25 percent this month—other pension funds could also increase their equity exposure, given that the GPIF rotation contributed to record returns for the fund. In addition to pension funds, Japan Post—Japan’s largest bank, insurance company and employer—may also shift some of its assets to stocks from bonds.
Market Realist – Monetary accommodation and increased equity buying by institutions could support stocks.
Monetary accommodation was the biggest catalyst and sustainer of the bull market after the crisis. Since its lows in 2009, the S&P 500 (SPY) has more than tripled. The current bull market in Japan has a similar ring to it. As we mentioned before, Japanese stocks have risen by 70% since late 2012. With quantitative easing likely to continue until 2016, both Japanese (EWJ) and European (IEV) (EZU) stocks are likely to perform better than American stocks, with the Fed likely to hike rates very soon.
The Government Pension Investment Fund (or GPIF) is the world’s largest pension fund. The GPIF announced a new target asset allocation, which moved the focus away from Japanese government bonds toward riskier asset classes like domestic and international equities (ACWI).
Actually, the shift has been taking place over the past several months. Other funds and retail investors usually follow the moves of the GPIF. This is likely to support stocks going forward.