Show us the (Japanese) money
Where is the Japanese money? Mostly it has been heading back to home shores as we wrote here yesterday.
The assumption was that the Bank of Japan’s huge money-printing campaign would push Japanese retail and institutional investors out in search of yield. Emerging markets were expected to capture at least part of a potentially huge outflow from Japan and also benefit from rising allocations from other international funds as a result. But almost a month after the BOJ announced its plans, the cash has not yet arrived.
EM investors, who seem to have been banking the most on the arrival of Japanese cash, may be forgiven for feeling a tad nervous. Data from EPFR Global shows no notable pick-up in flows to EM bond funds while cash continues to flee EM equities ($2 billion left last week).
But first, some good news. Retail investors are demonstrating some interest in emerging assets. Barclays says launches of toshin or investment trusts last week garnered $2 billion in subscriptions, with a Pacific Rim equities fund, partly geared to Asia, receiving $1.2 billion. The previous week saw a $500 million ASEAN fund while an emerging equities toshin started in March took in $1.6 billion. There has also been net new uridashi bond issuance in the Mexican, Brazilian, Turkish and Russian currencies over the past few weeks, Barclays data shows.
The bad news is that Japanese funds and insurers — and that’s where the big money is — have steered clear of emerging markets, and indeed foreign assets so far. Barclays writes that could be bad news for markets such as Hungary and South Africa, which have poor fundamentals and have benefited from talk of Japanese cash:
Aggregate Japanese flows to EM have not yet been significant, suggesting a risk that position-taking in EM longs (in anticipation of Japanese flows) could be disappointed. This could leave EM local markets, where fundamentals are weak, at risk of a setback.
Barclays notes, however, that Japanese investors it has surveyed recently described the 3-month prospects for emerging bonds and equities as “promising”. That probably indicates:
Japanese investor interest for EM is there, but…these investors probably only buy EM aggressively during price dips.
There is also the question of what the BOJ will do next. Signs are that Abenomics is starting to work, yet core inflation continued to fall last month, widening the gap with the central bank’s 2 percent inflation target. If the BOJ is forced into further easing action, Japanese investment outflows may well materialise.