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The Japan-India Axis
Japanese Investors to India’s Rescue?

Are Modi’s reforms paying off in India? The country has become hot investment for Japanese households, according to Reuters, and the policies of the Modi government are credited with helping to make the influx of capital possible:

Fund managers say the increased interest from Japanese investors is also a vote of confidence in the fiscal and market reforms of Prime Minister Narendra Modi, voted into office in May 2014.

Just the year before that, worries about India’s record current account deficit sent the rupee to a record low.

The reforms that have opened up India’s markets to foreigners were game changers for the so-called “Mrs. Watanabe” – Japanese retail investors driven by their country’s policy of zero interest rates to seek yield offshore.

Japanese retail investment into India through investment trusts in October was 462 billion yen ($3.76 billion), its highest level in 7 1/2 years and more than doubling the amount invested at the time Modi came to power. That’s in stark contrast to markets such as Brazil that have experienced heavy outflows from Japanese investors.

This certainly sounds like a not-insignificant boost for the Indian economy, but we aren’t sure the interest in India will last much longer. Modi’s policies may have helped encourage investment at first, but the pace of those reforms has now slowed, and Modi’s party has faced significant election setbacks. Japanese housewives probably don’t follow every twist and turn of the Indian economy or Indian politics, but at some point they might notice the same signs that institutional investors have already observed about where India is headed. If so, that would be bad news for one of the handful of emerging markets that has been prospering lately.

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