Many analyses indicate that 'global capital is flowing into Japan.' Why is this capital choosing Japan? Will it stay for the long term?

Why is Global Capital Flowing into Japan?

It's great to discuss this topic with you. Think of the global capital market as a large pool where money (often called "hot money" or "smart money") constantly seeks the safest places with the highest returns. Recently, Japan has become that "hot destination." The reasons aren't singular but rather a combination of factors.

1. Japan’s Own "Awakening": Internal Reforms Take Root

This is arguably the most fundamental reason. For decades, Japan’s economy was somewhat "stagnant"—prices didn’t rise, wages were flat, and both consumption and investment appetite were weak, a phenomenon economists call "deflation." But things are changing now.

• Bidding Farewell to Deflation, Embracing "Normalization": Japan is finally experiencing mild inflation, meaning prices are rising, companies are willing to raise wages, and people are more inclined to spend. It’s like a patient who’s been bedridden for a long time finally starting to move—economic circulation is accelerating. For investors, this signals stronger corporate profitability.
• Corporate Governance Reform (This is crucial!): Historically, major Japanese companies had a habit of hoarding cash in banks rather than distributing profits to shareholders. This frustrated investors: "I invest in you, but you don’t share profits or boost stock prices—what’s in it for me?"
  Now, the Tokyo Stock Exchange is leading the charge by "pressuring" these companies to enhance shareholder returns—through increased dividends and share buybacks (which typically lift stock prices). In essence, it’s about demanding companies learn to share their success with shareholders. This has ignited global investor enthusiasm, as they see tangible return prospects.

2. Global Turmoil Makes Japan a "Safe Haven"

Investment isn’t just about one market’s appeal—it’s also about alternatives.

• A Geopolitical "Star": Currently, Europe grapples with the fallout from the Russia-Ukraine conflict and lingering energy crises. U.S.-China tensions create uncertainty, deterring some China-bound capital. In contrast, Japan’s political stability and social safety make it a relatively secure choice.
• Warren Buffett’s Live Advertisement: When a titan like Buffett publicly endorses Japan and makes massive investments in its top trading houses, it sends a powerful signal. It’s like a top food critic queuing outside a restaurant—others naturally think, "This place must be good," drawing waves of follow-on capital.

3. The "Discount" from a Weaker Yen

This is straightforward. For foreign investors holding dollars or euros, the yen’s sharp depreciation means they can buy more Japanese assets with the same amount of money.

• Example: Suppose ¥110 previously equaled $1, but now ¥150 equals $1. A stock priced at ¥1,100 would have cost $10 before but now costs approximately $7.3. It’s essentially a "30% off" sale! This makes Japanese stocks, real estate, and other assets exceptionally attractive globally.

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Will This Capital Stay in Japan Long-Term?

This question hits the mark. Capital flows include "long-term money" (patient capital) and "short-term money" (quick-profit seekers).

So, will this inflow stay? I believe "some will stay long-term, but risks remain."

Arguments for Long-Term Stay:

1. Sustainability of Structural Reforms: Corporate governance reforms and escaping deflation aren’t overnight achievements—they’re multi-year, even decade-long transformations. As long as this narrative continues, pension funds, sovereign wealth funds, and other "long money" will stay to reap the rewards of Japan’s economic shift.
2. Valuation Room Remains: Despite the Nikkei hitting record highs, many Japanese firms’ valuations (e.g., P/E ratios) remain reasonable compared to U.S. stocks, leaving room for further upside.
3. Global Portfolio Rebalancing: Many large global funds were historically underweight Japanese assets. Their current reassessment represents a "correction," which will be gradual—sustaining inflows.

Risks That Could Trigger Outflows:

1. Yen Reversal: The biggest wildcard. Yen weakness now attracts capital, but if the Bank of Japan hikes rates aggressively to curb inflation, triggering rapid yen appreciation, the dynamic reverses. Foreign investors would face currency losses when converting yen assets back to dollars, potentially sparking massive outflows.
2. Global Recession: Japan’s export-reliant economy would suffer if global (especially U.S.) demand slumps. Investors would flee risk assets, including Japanese equities.
3. Reform Disappointment: If corporate reforms prove superficial—more talk than action on dividends and buybacks—investor patience will wear thin, leading to exits.

In Summary

Simply put, global capital is flooding into Japan because the country is undergoing positive structural changes (economic recovery + greater profit-sharing) amid a favorable external backdrop (geopolitics + yen weakness).

Whether this capital stays hinges on Japan’s ability to sustain these changes. If it stabilizes the economy and advances reforms, we may witness a prolonged bull market. But setbacks—especially sharp yen volatility—could trigger rapid inflows and outflows.

For ordinary investors, stay informed but remember: all investments carry risk, particularly in a market that’s risen so swiftly.