Japan witnessed record foreign inflows into its equities and long-term bonds in April, as global investors reacted to US President Donald Trump’s aggressive tariff announcements by reallocating capital away from American assets.
Data from Japan’s finance ministry showed net inflows of 8.21 trillion yen ($56.6 billion), the highest for any month since the government began tracking the data in 1996, according to Morningstar.
The surge in foreign interest was driven by heightened concerns over US policy stability and asset performance, pushing institutional investors to diversify their holdings.
“Trump tariff shocks likely changed global investors’ outlook on the US economy and asset performance, which likely led to diversification away from the US to other major markets including Japan,” said Yujiro Goto, Nomura’s head of FX strategy in Japan in a report by CNBC.
US tariffs triggered dramatic asset reallocation
Much of the inflows occurred in the immediate aftermath of Trump’s announcement of “reciprocal” tariffs in early April.
The US 10-year Treasury yield jumped 30 basis points from April 3 to 9, while Japan’s 10-year yield dropped 21 basis points during roughly the same period, reflecting a flight to safety.
While global equities initially slumped, Japan’s Nikkei 225 managed to end the month over 1% higher.
In contrast, the S&P 500 slipped nearly 1%. Analysts attributed this divergence to Japan’s haven status and institutional buying.
Pension funds, reserve managers, life insurers, and other asset managers were key drivers of the inflows, rather than retail investors, according to Nomura.
“It was quite an exceptional month, when you consider everything that has happened in the global macro economic environment,” said Kei Okamura, Neuberger Berman’s SVP and Japanese equities portfolio manager.
“That obviously had an impact in the way global investors were thinking about the asset allocation towards the U.S … they needed to diversify,” he told CNBC in a phone call.
Analysts say demand for Japanese assets to remain strong despite US’ trade deals
The recent shift in the US administration’s trade posture — including a breakthrough in negotiations with China and bilateral agreements with allies such as the UK — may slow the pace of flows into Japan.
But many analysts still expect strong demand for Japanese assets to persist.
Vasu Menon, managing director of the investment strategy team at OCBC, said that Trump’s unpredictable policy moves and frequent reversals have eroded global confidence in US assets.
“Given such a backdrop, demand for Japanese assets may remain healthy even if it is not as a strong as the April level,” he said.
Japan’s ongoing talks with the US with regards to tariffs have also raised some optimism over cutting the 24% “reciprocal” tariffs on Japan, Menon said.
Reforms at Tokyo Stock Exchange, currency outlook support flows
Beyond geopolitics, structural factors are also making Japanese assets more attractive.
Reforms at the Tokyo Stock Exchange, launched in March 2023, have focused on improving corporate governance.
Companies trading below a price-to-book ratio of one must now either comply with reforms or explain why they are not doing so.
This push has spurred a wave of share buybacks, boosting earnings per share and supporting valuations.
Asset Management One International said the initiative had enhanced the appeal of Japanese equities for both domestic and foreign investors.
Moreover, with the Japanese economy showing signs of recovery and the yen potentially set to strengthen if the dollar weakens again, many asset managers see further room for inflows.
“So this trend has legs,” said Okamura. “Japan will likely continue to see good flows.”
Limited upside seen in short-term bonds
While long-term bonds and equities drew significant foreign interest, short-term Japanese Treasury bills are unlikely to attract similar inflows.
The arbitrage opportunities that existed when the Bank of Japan maintained negative interest rates have largely disappeared, said Morningstar’s Michael Makdad.
Still, Japanese equities in particular are benefiting from a confluence of favourable conditions — trade diversification, domestic reforms, and relative economic stability — making the country a compelling choice for global capital.
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