After the Lower House election, overseas investors focused on the treatment of the Foreign Exchange Fund Special Account and the outlook for Japanese equities. A Nomura Securities strategist reviewed the current status of its assets and surplus funds, as well as discussions on the future use of its fiscal resources and its exit strategy.
After the election, overseas investors’ focus is turning to the Foreign Exchange Fund Special Account’s fiscal resources and the potential use of its foreign-exchange translation gains. The account’s assets stand at ¥191.4 trillion and its liabilities at ¥110.7 trillion, leaving a difference of ¥80.7 trillion, which has expanded to one of the largest levels on record. Foreign-exchange translation gains have reached ¥50.3 trillion, a substantial improvement from the ¥11.5 trillion loss recorded at the end of 2020.
Potential uses of the Foreign Exchange Fund Special Account’s fiscal resources include transfers of surplus funds to the general account, as well as the use of foreign-exchange valuation gains. However, selling foreign-currency assets could be viewed as market intervention, and significant hurdles to implementation remain. The view has been expressed that an exit strategy for the Foreign Exchange Fund Special Account needs to be considered over the medium to long term.
Expectations of a post-election rally are seen as the main driver of higher Japanese share prices, and a scenario assuming TOPIX at 4,050 and the Nikkei Average at ¥60,000 was also discussed. Amid the possibility of large-scale buying by foreign investors, expectations of wage increases and views on the limited impact of a consumption-tax cut, attention is also focused on yen depreciation and appreciation trends and the impact of rising interest rates.
Tensions in Japan-China relations, trends in inbound tourism demand and factors such as rare-earth export restrictions could affect Japanese equities, while the duration of the stock market’s response to post-policy-event developments remains uncertain. There is also a view that expectations of a prolonged administration and the stability of fiscal management will influence overseas investors’ stance toward the local market.