The Tokyo-Beijing See-Saw: What’s Behind the Divergence?

The relationship between Japan and China’s stock markets is marked by a curious phenomenon - their performance is mirroring each other in opposite directions. This trend has been building for years, with Japan’s market initially leading the charge in the 1980s as Japanese companies were hailed as darlings of the equity world. However, this was short-lived, and since then, Japan has been on a long journey back to relevance.

Meanwhile, China’s stock market has grown exponentially, becoming one of the largest markets in the world. Yet, despite its size and influence, China’s trajectory is often marked by volatility and unpredictability. The recent performance of Japanese-focused ETFs like iShares MSCI Japan (EWJ) and Chinese large-cap vehicles like iShares China Large-Cap (FXI) offers a clear picture: they are moving in opposite directions.

The divergence between these two markets can be attributed, in part, to central bank policies. The Bank of Japan’s decision to raise interest rates and unwind yield curve control has bolstered the yen but also compressed valuation multiples for export-heavy Japanese equities. Conversely, the People’s Bank of China’s aggressive monetary easing and targeted fiscal stimulus have driven a tactical rebound in Chinese equities.

The role of institutional capital rotation is also significant. International allocators used Japanese equities as their primary Asia allocation between 2022 and 2025, driving the Nikkei and EWJ to multi-decade highs on corporate governance reforms. In contrast, Chinese stocks were sold off to historical valuation lows. Once Japanese equities reached full valuations alongside BOJ rate hikes, global funds began taking profits in Japan and reallocating capital into deeply discounted Chinese tech and large-cap shares.

This phenomenon is not new; similar patterns have played out before. For instance, in late 2022 and early 2023, China’s economic reopening announcement sparked a massive rally in Chinese ETFs, during which Japanese equities traded sideways as global capital temporarily abandoned Tokyo to chase the Beijing rebound.

Historically, extreme performance spreads between Japan and China ETFs do not persist indefinitely. They typically resolve in two stages: an initial policy-driven rally in China often runs into headwinds, followed by a gradual return of institutional money into Japanese equities as fundamentals improve. However, this time may be different, with the current divergence being more pronounced than ever before.

Some analysts warn that these markets are poised for a massive sell-off, one that could leave even seasoned investors caught off guard. As the seesaw continues to swing between Tokyo and Beijing, it’s unclear whether investors will be able to profit from trading FXI and its Japanese counterpart, EWJ. The story is far from over, with many factors still at play.

The interplay of central bank policies, currency mechanics, and institutional capital rotation will continue to shape the markets in the coming months. For now, it’s a game of wait-and-see – and perhaps a healthy dose of caution would serve investors well. The Tokyo-Beijing see-saw has become an integral part of global economic trends, with its implications extending far beyond the shores of Asia.