US investors flock to Japanese equities amid Nikkei’s massive returns

US investors are increasingly buying Japanese stocks focused on tech and artificial intelligence, lured by the country’s hefty returns compared with American stocks, according to Goldman Sachs.

“The increase in US flows is now moving at the fastest pace we’ve seen since Abenomics,” said Bruce Kirk, the bank’s chief Japan equity strategist. US investor active participation in Japanese equities was at the highest level since October 2022, Kirk said, adding that he received frequent requests for meetings.

The inflow of US funds reflects the strong performance of Japanese equities in dollar terms this year. They have been helped by a 2.5 per cent gain in the yen and renewed optimism driven by the pro-stimulus policies of Prime Minister Sanae Takaichi. The benchmark Nikkei 225 index has climbed about 30 per cent in dollar terms this year, far outpacing the S&P 500 index’s 14 per cent gain.

Rising participation from US funds could mark a turning point for Japan’s equity market, signalling a potential shift in drivers to growth-oriented shares from value stocks. Driven by pro-investor initiatives from the Tokyo Stock Exchange and the government, value stocks have outperformed growth stocks for four consecutive years since 2021.

“It’s very significant that you’ve got more US participation coming and they tend to gravitate towards tech and AI-related themes,” Kirk said in an interview last week.

Kirk saw further upside in foreign fund inflows as global investors’ net positions in Japanese equities remain light compared to the peak of Abenomics, leaving room for further buying. Global investors’ continued diversification needs were likely to sustain that trend, he said.