Japan’s foreign investment flow into domestic equities weakened in the week to 12 June, according to the latest figures. Net purchases shifted further into negative territory, moving from ¥-701bn in the prior period to ¥-785.1bn.
The data points to an acceleration in net selling by overseas participants over the latest reporting window. The change extends the earlier deficit and leaves the weekly balance deeper in the red than previously.
Foreign Investor Outflows Signal Risk-Off Shift
We are noting the increased pace of foreign selling in Japanese stocks, with net outflows hitting ¥785.1 billion in the week of June 12. This is a bearish signal, as sustained selling from these key investors puts direct downward pressure on the Nikkei 225 and Topix indices. This trend suggests a growing risk-off sentiment specifically toward Japan.
This investor caution appears linked to the Bank of Japan’s recent pivot away from its ultra-loose monetary policy and a strengthening yen. The USD/JPY has fallen from its highs above 155 earlier in the year and is now hovering around 149, which cuts into the overseas profits of Japan’s major export-led companies. We believe this currency headwind is a primary reason for the foreign capital flight.
Positioning and Strategy Amid Growing Volatility
In response, we are positioning for potential downside or increased choppiness in the coming weeks. This involves buying put options on the Nikkei 225 as a direct bet on a market decline or to hedge existing long positions. The Nikkei Volatility Index has already risen over 10% this month, and we expect that trend to continue, making long volatility strategies attractive.
This situation is reminiscent of past periods, like in 2018, when concerns over global growth and a strengthening yen prompted significant foreign outflows and led to a market correction. History shows that foreign selling of this magnitude is often a reliable leading indicator for a drop in Japanese equities. Therefore, we view the current data as a clear warning sign for the near term.
While the primary strategy is cautious, we will also watch for capitulation signals. A sharp, high-volume sell-off could present an opportunity to sell put options at inflated premiums, betting that the worst of the panic is over. For now, however, we are reducing our long exposure and preparing for further weakness into July.
