Foreign Investors' Influence on Japanese Stock Market
Foreign investors play a significant role in the Japanese stock market, accounting for 70% of the trading value. Recently, these investors have been selling Japanese stocks, causing a noticeable decline in share prices since early July. Initially, they bought approximately JPY 2.9 trillion (around $20 billion) in Japanese equities from the start of 2024 until mid-July. However, the trend reversed over the last three weeks, with investors becoming net sellers, offloading JPY 40 billion ($275 million) year-to-date by August 2.
Maintaining Optimism Despite Selling Trends
Although foreign investors have turned to selling, they haven't completely lost faith in Japanese stocks. They've kept their long positions in cash equities, indicating a constructive medium-term outlook on the market. Instead of cash equities, they've been net sellers of futures. This suggests a lack of confidence in short-term market catalysts, concerns over yen volatility, and broader global economic uncertainties.
Domestic Investors and Corporate Buybacks
In contrast, domestic individual investors and Japanese corporations have shown confidence in the market. Domestic investors have been net buyers, while corporations are executing previously announced large-scale share buybacks. This strategy indicates a belief in the market's long-term potential.
Market Volatility and Currency Impact
The unexpected market volatility coincides with a sharp appreciation of the yen, reducing the potential upside for Japanese stocks. A stronger yen can make Japanese exports more expensive and less competitive globally, affecting company profits.
Future Outlook
As the situation stabilizes and uncertainties such as yen volatility and global risk sentiment become clearer, there's potential for a shift in investment strategies. Analysts at UBS Global Research predict that foreign investors might transition from maintaining cash positions to increasing them. Such a shift could support a sustainable upward trend in Japanese stocks. This optimism is rooted in the belief that Japanese companies are on track to sustainably improve their profitability and return on equity.
In conclusion, while recent trends show a sell-off by foreign investors, the underlying sentiment remains cautiously optimistic. As factors like yen stability and global economic indicators stabilize, the Japanese stock market could rebound, supported by both domestic and foreign investment.
