Japan: Passive foreign interest limits upside – BNY

BNY’s Geoff Yu notes that foreign demand for Japanese equities remains subdued compared with interest in JPY and JGBs. Despite a 22% JPY-based return for the MSCI Japan Index in 2025, international investors’ holdings lagged benchmarks, with flows constrained by allocation limits and Japan’s lesser role in the semiconductor theme. He argues that any rebalancing is more likely to favor JGBs.

Flows lag performance and benchmarks

"In our recent special report on Japan’s intervention, we highlighted that interest in owning JPY and JGBs is already emerging. Equities remain the weak link. Despite its industrial prowess, Japan hasn’t been as prominent in the semiconductor/memory chip theme as Taiwan and South Korea."

"The recent correction does create space for Japan, if a long-term growth and earnings narrative can be established. The initial reaction to JPY strength would also undermine Japanese equities due to earnings translation. Equities also comprise the bulk of cross-border portfolio investment in Japan (63% as of end-2025), so any rebalancing will likely favor the JGB market."

"Japanese survey data as of end-2025 don’t point to a surge flow story. In JPY terms, based on the MSCI Japan Index, Japanese equities returned 22% over the year. The median gain in holdings by key international investors was 17%, somewhat behind benchmarks."

"The U.S. and Europe account for nearly 90% of all international equity holdings in Japan, totaling nearly ¥320tn as of the end of 2025. Rather than respond to the earnings outlook, structural shifts in hedge ratios will have the biggest impact, especially if front-end rates show closer sign of alignment. However, currency markets will need to be realistic about the numbers."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)