Japan equity inflows remain strong despite monetary tightening surprise

The Bank of Japan shocked global markets on July 31 with its rate hike, affecting asset classes from US tech stocks to cryptocurrencies. But what have the effects been on its home equity market?

According to fund-flow data from our partners at EPFR, two episodes of Bank of Japan "policy normalization" have had some effect. But as our first chart shows, Japanese equity funds have still posted a solid net inflow for 2024 (if not as strong as the one seen in 2020-21).

On March 19, the BoJ ended years of negative interest rates and signaled it was winding down other forms of unconventional monetary policy, such as yield curve control and asset purchases. The key interest rate was now in positive territory, in a range between 0% and 0.1%. On July 31, the key rate was increased to about 0.25%, and more bond-purchase unwinding was revealed.

Our second chart zeroes in on 2023-2024 performance to highlight these two dates. We can also see a notable uptick in the most recent daily data.

EPFR's country allocation statistics tell us that the most recent positive weekly flows were largely supported by funds from Asia (Malaysia, Australia, and South Korea in particular); net flows from most of the Americas and Western Europe (in particular, France and Germany) were largely negative.

While global markets took the July 31 move as a surprise, the BoJ had been communicating its intentions to local investors for some time, noting an increase in core inflation and higher wage settlements.

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