Looking at the trends of foreign investors is a must when it comes to forecasting the Japanese stock market. Foreign investors account for more than 60% (at times as high as 70+%) of the trading value of the Tokyo Stock Exchange. It is no exaggeration to say that the market direction is decided by their balance of buying and selling. The Nikkei Stock Average rose from 8,000 JPY to 20,952 JPY from the end of 2012 to mid 2015 largely due to these foreign investors aggressively buying Japanese stocks.
However, since August of 2015 there has been a complete turnaround. The Nikkei Average saw a 20% drop in under two months between the second week of August and September. The primary cause was concerns over China's economic slowdown, the so called "China Shock", with foreign investors selling over 4 trillion yen of stock in this period. Since then Japanese stocks have been unable to escape this situation, largely due to foreign investors turning towards selling (Sales have exceeded roughly 6 trillion yen from the beginning of 2016 to the end of September). The reason the Nikkei Average hasn't crashed due to this, is that the Bank of Japan and Japanese pension funds have supported buying. By the end of September the Bank of Japan had bought 3 trillion yen worth via ETF, with the GPIF which operates pension funds buying an extra 3 trillion, 600 billion yen, absorbing the selling of foreign investors.
However, in order for Japanese stocks to rise significantly by the end of the year, buying by Japanese investors will be necessary. The BOJ or pension fund simply cannot buy at higher prices, and can at most "supportively buy" when there is a drop in stock prices.
While one might think that having sold 6 trillion worth, they would be poised to turn to buying, but in fact for 3 years after 2012 the total amount of Japanese stock bought was over 20 trillion (According to the TSE's "Investment buying and selling trends"), making it risky to judge based only of the size of the amount.
The best scenario is, 1) Hillary Clinton is elected President of the United States, 2) The America FRB decides on a rate hike within the year, 3) there is no recurrence of financial instability in Europe, and 4) China and other developing economies strengthen. The chances of these 4 requirements all being fulfilled is about 50/50, but none of them individually seem so unlikely. If they really do happen, the dollar-yen exchange rate will proceed to a low yen, and foreign investors should start to buy Japanese stock again. If they continue to buy at higher prices, and individual investors follow suit, then the Nikkei Average might once again break the milestone of 20,000 yen. It goes without saying that this "Risk on" stance of investors would have a positive impact on the real estate market.
Oct. 25, 2016