Foreign buying of Japanese stocks has reached a record level as global investors buy into the country’s economic recovery.

Overseas investors bought Y9,441bn ($78.9bn) more in Japanese shares than they sold in the year to November 18, according to the Tokyo Stock Exchange. The figure includes trading on the Osaka and Nagoya exchanges and beats the previous record of Y9,127bn in 1999.

Feverish overseas interest has been the biggest reason behind Japanese stocks’ sharp rise. The Tokyo Stock Price index climbed 33 per cent to 1,529.67 by last Friday – though the rise is still dwarfed by the near 60 per cent increase in 1999.

Shoji Hirakawa, chief equity strategist at UBS in Tokyo, said: “One of the reasons foreign investors are buying Japan is for the rebound of the global economy, and the second is for Japan’s restructuring story.”

In spite of many years of poor performance, the Japanese stock market remains the world’s second largest and foreign investors are drawn to sectors that have undergone successful reform, such as banking.

But the strong interest shown by foreigners contrasts with the scepticism of Japanese institutional investors, who are still net sellers.

For this reason, Japan bears regard this year’s share price rally as very fragile. However, Mr Hirakawa said domestic institutions had lost out by being too cautious.

Foreign buying of Japanese shares has exceeded selling for 23 straight weeks, helping to push up prices to the point where, by measures such as the dividend yield, Japan seems expensive compared with other countries.

Foreign hedge funds, which were strong net buyers of Japanese shares earlier in the year, have trimmed long positions in the country’s equity market, said market watchers.

However, most analysts do not expect foreigners to become net sellers for the rest of the year.

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