Yen Surge and Policy Unrest Trigger Massive Foreign Sell-Offs in Japanese Stocks
As of the week ending August 2, foreign investors continued to sell off Japanese stocks, fearing the potential impact of a stronger yen on export-reliant companies' profitability. The historical interest rate hike by the Bank of Japan further supported the yen. However, retail investors continued to buy Japanese equities.
Data from the Tokyo Stock Exchange showed that foreign investors sold off Japanese stocks worth 1.07 trillion yen ($7.33 billion) last week, following net sales of 1.58 trillion yen the previous week.
Overall, foreign investors have net withdrawn 1.14 trillion yen from Japanese stocks this year, contrasting sharply with a net purchase of 7.91 trillion yen last year. Foreign investors also net sold 515.41 billion yen in derivatives contracts, marking the third consecutive week of net sales. They disposed of about 552.43 billion yen in cash stocks.
In contrast, retail investors continued to snap up Japanese stocks last week for the fourth straight week of net purchases, marking the longest streak since early January 2023. According to data from the Japan Exchange Group, retail investors net bought 469.21 billion yen ($3.2 billion) through cash and futures transactions.
Japanese stocks experienced a roller-coaster ride. Affected by the uncertainty of the Bank of Japan's tightening policy path and concerns over a slowdown in the U.S. economy, the yen surged, and the Nikkei 225 index dropped 4.67% last week.
On Monday, the Nikkei 225 index plummeted 12.4%, the largest single-day drop since Black Monday in 1987. The following day, the index rebounded sharply by over 10%, marking the largest single-day gain in history.
Naoki Kamiyama, Chief Strategist at Nikko Asset Management, stated: "The current level seems to be where the market is finding a foothold for the recovery path." He added, "Supported by continuous wage growth, domestic demand in Japan remains strong, and we believe wage growth could become a catalyst for the recovery of the Japanese stock market."
The Bank of Japan last week raised its interest rate target to 0.25%, the highest level in 15 years, pushing the yen to a high of around 141.66 yen per dollar on Monday before retreating some gains in the subsequent days.
In the bond market, cross-border investors were net sellers of Japanese bonds for the eighth consecutive week, according to Japan's Ministry of Finance. Foreign investors sold off 953.5 billion yen in short-term Japanese bonds, marking the eighth straight week of net sales.
Long-term Japanese bonds saw a net outflow of 1.16 trillion yen from foreign investors, reversing an inflow of 1.21 trillion yen the previous week. After three weeks of net selling, Japanese investors purchased 669.7 billion yen in long-term overseas bonds and about 7.1 billion yen in short-term bonds. Japanese investors also net bought 1.29 trillion yen in foreign stocks, the highest level since at least January 2005.