What are investors buying and selling in Japan?

Foreign investors, who account for 70% of the trading value of Japanese stocks, have been leading the recent decline in share prices since early July.

As per analysts at UBS Global Research in a note dated Friday, after purchasing about JPY 2.9 trillion (about $20 billion) worth of Japanese equities from the beginning of 2024 until mid-July, foreign investors reversed their positions, selling off their holdings over the past three weeks.

This has led them to become net sellers, shedding JPY 40 billion ($275 million) year-to-date as of August 2.

However, a deeper analysis reveals that these investors have not completely abandoned their optimistic outlook on Japanese stocks. While they have turned net sellers, they have maintained their long positions in cash equities since last year, signaling a constructive medium-term view on the market.

Instead, they have been net sellers of futures, a move likely driven by a lack of conviction in immediate market catalysts, concerns over high yen volatility, and global macroeconomic uncertainties.

Domestic individual investors and Japanese corporations have taken a different approach during this period of turbulence. Domestic investors have been net buyers, and Japanese corporations have been steadily executing large-scale share buybacks announced earlier in the fiscal year.

“Of course, the market volatility in recent weeks was unexpected, and it is undeniable that the yen’s sharp appreciation has lowered the potential upside of Japanese equities,” analysts said.

As the dust settles 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 in Japanese stocks, especially as the focus shifts from yen depreciation to the ability of Japanese companies to sustainably improve their profitability and return on equity.