What Are Investors Buying and Selling in Japan?

Foreign investors, responsible for 70% of the trading volume in Japanese stocks, have been a major factor in the recent downturn of share prices since early July.

According to analysts at UBS Global Research, foreign investors initially acquired approximately JPY 2.9 trillion (around $20 billion) in Japanese equities from the start of 2024 until mid-July. However, in the last three weeks, these investors reversed their strategy and began liquidating their holdings.

As a result, they have turned into net sellers, offloading JPY 40 billion ($275 million) in stocks as of August 2.

Despite this shift, a closer look indicates that foreign investors remain optimistic about the long-term potential of Japanese stocks. While they have transitioned to a net-selling position, they continue to hold long positions in cash equities from last year, which suggests a positive medium-term outlook for the market.

Instead of abandoning the market, these investors have focused on selling futures, likely due to uncertainty around immediate market drivers, worries about considerable yen volatility, and broader macroeconomic factors.

In contrast, domestic individual investors and Japanese corporations are adopting a more aggressive stance during this period of market fluctuations. Domestic investors have been net buyers, while Japanese companies have actively pursued substantial share buybacks that were announced earlier in the fiscal year.

Analysts noted that the recent market volatility was unforeseen, and the yen’s sharp appreciation has diminished the potential growth of Japanese equities.

As market uncertainties, including yen volatility and global risk sentiment, start to stabilize, UBS analysts anticipate that foreign investors will transition from merely holding cash positions to increasing their investments.

This change could set the stage for a sustainable upward trend in Japanese stocks, particularly as the focus shifts from yen depreciation to the capacity of Japanese companies to enhance profitability and return on equity consistently.