Japanese investors boosted purchases of foreign shares nearly six-fold in 2004 as confidence in the global economy made them more willing to buy riskier assets.
Calculations based on government data released on Friday showed Japanese investors were likely net buyers of foreign stocks for the ninth straight month in December, their longest consecutive buying spell since the U.S. tech bubble burst in 2000.
"A shift in investment into stocks took place worldwide in 2004 as fears of global deflation receded, and this reflects it," said Takuji Aida, a senior economist at Merrill Lynch.
Weekly capital flows data from the Ministry of Finance (MOF) showed Japanese investors bought a net 24.6 billion yen ($234.5 million) of foreign stocks during the week of Dec. 27-30.
That brings net purchases of foreign stocks for December to around 200 billion yen and for the whole of 2004 to 1.886 trillion yen.
The yearly figure is nearly six times that of 2003, when they only bought a net 332.6 billion yen.
The ministry will release December capital flows data later this month.
Japanese investment abroad has in the past been mostly in the United States and Europe, but 2004 saw a surge in investment in Chinese shares.
According to MOF data, Japanese investors bought a net 343.9 billion yen of Hong Kong shares as of the end of October, the highest since the ministry started compiling data in 1996 and close to 14 times that in 2003.
The MOF does not give a separate figure for Japanese investment in mainland China.
"The size of Chinese share buying is still relatively small with the U.S. and Europe still the key regions, but money is flowing into Chinese and other emerging markets," said Soichi Okuda, a senior economist at Sumitomo Shoji Research Institute.
As of the end of October, Japanese bought a net 5.25 trillion yen of U.S. shares, compared with 7.1 trillion yen in 2003.
RECORD FOREIGN BUYING OF JAPAN STOCKS
Meanwhile, foreign investors' buying of Japanese stocks in 2004 is also likely to have swelled to 10.3 trillion yen, the highest since MOF started compiling data in 1999.
"When worries over global deflation receded, Japan was the greatest benefactor because it was worst hit by deflation," said Merrill's Aida.
Unlike the U.S. Federal Reserve, which raised interest rates by 125 basis points in 2004, or the Bank of England, which raised them by 100 points, the Bank of Japan has yet to move as prices in Japan remain under downward pressure.
But many analysts think the worst is over for Japan's economy and that deflationary pressure should ease.
"Amid a global recovery in share prices it's hard to ignore Japan and not invest in any Japanese stocks," said Sumitomo's Okuda.
Analysts expect capital inflows into Japanese stocks and outflows into foreign shares to continue as long as the global economy keeps expanding.
But they do not see this as having any major impact on the foreign exchange market.
"The impact on the forex market has been and is likely to be limited, since investors aren't out to get profits from currency movements," said Okuda. ($1=104.90 Yen)