According to Refinitiv Lipper data, Japanese equity funds obtained an inflow of $469 million in September, their first inflow since March this year.

Having blocked entry to visitors for about two-and-half years, Japan has eased border control requirements this week, ending some of the world's strictest border controls to slow the spread of COVID-19.


Graphic: Money flows into Japanese equity funds

"Global economy is slowing down, geopolitical risks are still high. The place investors can hide (their money) is the reopening story, which may be the only story we have at this point," said Toru Ibayashi, head of Japanese equities research at UBS SuMi Trust.

"Inflow will continue, in my opinion, especially when the yen is more stabilized, which is important for international investors who invest in Japan."

The yen is at 32-year lows, but its pace of decline against the dollar has moderated this month, due to the government's dollar-selling intervention. The yen declined about 4% each in the last two months.

The Nikkei 225 index has fallen about 5.8% this year, faring better than MSCI World index's decline of 25.3%, as shares of major Japanese export firms were underpinned by a drop in the yen.

In September, the Nomura NF Topix ETF obtained $360.6 million, while AM-One Japan Equity Index Fund 225 and AI Japan Eq Fd UK Crp Acc Unites got $266 million and $238 million, respectively.

"Some investors who had previously been relatively uninterested in Japanese equities are now seeming eager to invest in stocks related to this inbound tourism theme," said Yunosuke Ikeda, senior economist at Nomura.

"While Japanese investors may have already taken their positions back up to around the neutral level, our impression is that European and North American investors are just starting to do this now."

According to a recent Reuters survey, some 28% of 500 big non-financial Japanese firms think inbound tourism demand will return to pre-pandemic levels by end-2023 while 18% expect it to return to those levels in 2024 or later.

Cheaper valuations could also attract investors toward Japanese stocks, some analysts said.

"Valuations are still attractive, particularly on a price-to-earnings (P/E) basis given the outperformance of Japan earnings," Morgan Stanley analysts said in a report.

According to Refinitiv Eikon, MSCI Japan's forward 12-month P/E stood at 12.7, lower than the MSCI World's 15.2.

However, some worries still linger as a weakening yen has increased the import costs of raw materials and energy, affecting companies' margins.

A recent Tankan survey showed business confidence among big Japanese manufacturers fell for a second straight month to hit its lowest in five months.

However, the survey showed the sentiment for non-manufacturers improved slightly.

(Reporting by Patturaja Murugaboopathy and Summer Zhen; Editing by Vidya Ranganathan and Sherry Jacob-Phillips)

By Summer Zhen and Patturaja Murugaboopathy