NEW YORK (
) -- Japan's aggressive stimulus measures are moving yen-based investors into U.S. equity markets, creating an additional tailwind at a time when the
is enjoying its best start to a year since 1991.
Japanese asset managers have been selling billions of dollars of government bonds to the Bank of Japan as part of Prime Minister Shinzo Abe's campaign to jump-start the country's long sluggish economy. Abe's policy regime, referred to as "Abenomics," involves central bank bond purchases and other measures to attain a 2% inflation target within two years.
Asset managers are then deploying the bond sale proceeds into the U.S. market taking advantage of its liquidity, selection of securities and comparatively stable economic environment compared to the rest of the world.
Drew Edwards, portfolio manager at the Chicago-based Advisory Research, which oversees more than $10.2 billion in assets, said his Japanese clients have been exhibiting a particularly keen interest in high-yielding U.S. stock investment vehicles that come with special tax advantages. Chief among them are master limited partnerships (MLPs), real estate investment trusts (REITs), and business development companies (BDCs).
"We manage a $3 billion MLP product, the FAMCO MLP, that they seem to be particularly interested in," said Edwards.
Not long after Abe took office in December, 2012, Nikko Asset Management started the Nikko Gravity Americas Fund which attracted 200.1 billion yen ($2.3 billion) in retail investments. This was the largest ever raised from Japanese retail investors in a U.S. equity-oriented fund and the largest to launch in the country since 2006.
According to Morningstar, 228.4 billion yen ($2.27 billion) of Japanese funds flowed into U.S. equities in 2012 but the vast majority of that amount, or 220.3 billion yen ($2.19 billion), moved in December as the drumbeat of Abe's campaign for aggressive stimulus measures resonated with voters.
"The scale of QE coming out of Japan is massive. As the Bank of Japan doubles the monetary base, it will definitely move the needle on U.S. equities," said Edwards. "If you have the animal spirits return, which we really are seeing now, this is important not just for Japan, but it's important for the world economy."
The question now is whether Abenomics can successfully keep long-term bond yields low in order to stimulate the economy.
If the government's measures fail to breathe life into Japan's economy, investors there may lose faith in Abe's economic shock therapy treatment as well as their risk appetite for U.S. stocks. And as U.S. investors watch the impact of spikes in Japanese bond yields on the psyche of the Japanese investor, they themselves may decide they're not yet ready for higher bond yields either.
So far, Japanese bond yields have been volatile. The Japanese 10-year yield for instance doubled to 1% on May 23, its highest level in more than a year from an all-time low in April 4 when the Bank of Japan announced a dramatic ramp-up of its easing program. The move coincided with a 7.3% drop in the Nikkei 225, the Japanese benchmark's worst single-day loss since March 2011 in the aftermath of the country's earthquake and tsunami disaster.
While the higher JGB yields may be a reward for signs that Abenomics is already working, its link to U.S. 10-year Treasury yields has been presented as a more plausible explanation for the sudden climb in Japanese yields. The U.S. 10-year yield has also been driven up in recent weeks, fuelled by speculation that the Fed will be trimming its bond purchases soon.
"There's a bit of confusion [over the yields] at this point, and that's the sort of thing that in my mind could trip up investors," said Andrew Wilkinson, the New York City-based chief economic strategist at Miller Tabak & Co.
Wilkinson said he thinks that equities still remain "quite appealing" given that the U.S. economy has improved "vastly and probably more than most onlookers thought possible" as a result of the Fed's stimulus moves and if Japan can successfully reflate its economy. However, "I don't think the move we are seeing [in U.S. stocks] will continue on an exponential path."
Some people are concerned that Japanese money is causing the overheating.
"'Hot money' is now hitting the U.S. from Japan. It can easily leave once things start to turn negative," said Keith Bliss, senior vice president at Cuttone in New York.
Written by Andrea Tse in New York
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