Foreign investors, who account for 70% of Japanese stock trading value, have been driving the recent slide in stock prices since early July.
After buying 2.9 trillion yen (about $20 billion) worth of Japanese stocks from the start of 2024 through mid-July, foreign investors have reversed their positions and sold their holdings over the past three weeks, according to a note by analysts at UBS Global Research dated Friday.
This has led them to become net sellers, losing 40 billion yen ($275 million) since the start of the year through August 2.
But a deeper analysis reveals that these investors have not completely abandoned their bullish outlook on Japanese stocks. Although they have become net sellers, they have maintained their long positions in cash stocks since last year, indicating a medium-term constructive view of the market.
Instead, they turned into net sellers of futures contracts, a move that may have been driven by disbelief in spot market catalysts, concerns about high yen volatility, and global macroeconomic uncertainty.
Domestic retail investors and Japanese companies have taken a different approach during this period of turmoil. Domestic investors have been net buyers, and Japanese companies have been steadily executing large-scale share buybacks that they announced earlier in the fiscal year.
“Of course, the market volatility in recent weeks has been unexpected, and there is no denying that the sharp rise in the yen’s value has reduced the prospects for Japanese stocks to rise,” analysts said.
As the situation stabilizes and uncertainties such as yen volatility and global risk sentiment become clearer, analysts at UBS Global Research expect foreign investors to shift from maintaining their cash positions to increasing them.
This shift could pave the way for a sustainable upward trajectory for Japanese stocks, especially as the focus shifts from the depreciation of the yen to the ability of Japanese companies to sustainably improve their profitability and return on equity.