Japan’s Investment Landscape: What’s Hot and What’s Not
Foreign investors, who contribute to 70% of the trading value in Japanese stocks, have been at the forefront of the recent downturn in share prices since early July.
According to a note from UBS Global Research on Friday, these investors had purchased approximately JPY 2.9 trillion (about $20 billion) worth of Japanese equities from the start of 2024 until mid-July. However, in the past three weeks, they reversed their positions, leading to a sell-off. As of August 2, this activity resulted in net sales totaling JPY 40 billion ($275 million) year-to-date.
Despite this shift, a closer examination reveals that foreign investors have not entirely lost confidence in Japanese stocks. While they have become net sellers, they continue to hold long positions in cash equities, which they have maintained since last year. This suggests a positive medium-term outlook on the market.
Instead, these investors have primarily sold futures, likely due to a lack of conviction in immediate market catalysts, concerns about yen volatility, and uncertainties in the global macroeconomic environment.
In contrast, domestic individual investors and Japanese corporations have responded differently to the recent market turbulence. Domestic investors have been net buyers, and Japanese corporations have consistently executed large-scale share buybacks that were announced earlier in the fiscal year.
“The recent market volatility was certainly unexpected, and it’s clear that the yen’s sharp appreciation has reduced the potential upside for Japanese equities,” noted analysts.
As uncertainties such as yen volatility and global risk sentiment become clearer, UBS Global Research analysts anticipate that foreign investors may transition from holding their current cash positions to increasing them. This shift could set the stage for a sustainable upward movement in Japanese stocks, especially as attention moves from yen depreciation to the capacity of Japanese companies to enhance their profitability and return on equity in a sustainable manner.
