Japanese investors are showing a significant decline in their decades-long fascination with overseas assets. With a staggering $4.4 trillion in foreign investments exceeding the GDP of India, any potential divestment could create notable disturbances in global markets. Despite the narrowing interest rate gap between Japan and other countries, the inflow of funds remains steady rather than overwhelming, alleviating some concerns among investors.
According to industry experts, this shift marks a major trend and supercycle for the next five to ten years. Investors are expected to steadily, progressively, and significantly redirect capital back to Japan. In the first eight months of this year, Japanese investors made a net purchase of 28 trillion yen ($192 billion) in Japanese government bonds, achieving the highest level in at least 14 years for the same period. Simultaneously, they slashed their foreign bond purchases by nearly half to just 7.7 trillion yen, while their acquisitions of overseas stocks fell to less than 1 trillion yen.
Japanese foreign investments have often been likened to a substantial carry trade, where investors exploit ultra-low domestic interest rates to fund international acquisitions. The scale of this capital movement will largely depend on the pace and direction of Japan's interest rates. Although Bank of Japan Governor Kazuo Ueda has indicated that policymakers will cautiously consider any plans for interest rate hikes, strategists almost unanimously predict that the yen will continue to strengthen into next year as the central bank's policy normalizes.
