Japanese Equities Surge Despite Foreign Investors' Massive Sell-Offs

Foreign investors sell ¥1.18 trillion in Japanese stocks, marking the largest outflow in six months amid BOJ policy shifts.

By Athena Xu

4/4, 06:04 EDT

Key Takeaway

  • Foreign investors sold ¥1.18 trillion ($7.8 billion) in Japanese stocks and futures, the largest sell-off in six months.
  • BOJ's policy shift prompted a ¥3.89 trillion ($25.7 billion) sell-off in bonds, marking a significant strategic adjustment.
  • Despite foreign selling, Japanese equities surged, with reforms and government initiatives bolstering market confidence.

Foreign Investors Sell Japanese Stocks

In a significant move, foreign investors offloaded a net ¥1.18 trillion ($7.8 billion) of Japanese stocks and futures in the week ending March 29, marking the largest sell-off in six months. This activity coincided with the end of the quarter, a time when funds typically rebalance their portfolios. The sell-off contributed to a 1.3% decline in the Nikkei 225 Stock Average, which had previously reached new highs. Despite this, the Japanese stock market concluded its best quarter in over a decade, buoyed by the strong performance of both the Japanese and US economies, a sustained weak yen, and expectations of improved shareholder returns.

Strategic Shift in Japanese Bonds

The Bank of Japan's (BOJ) decision to raise its short-term policy rate, ending negative interest rates and yield-curve control, prompted foreign investors to sell ¥3.89 trillion ($25.7 billion) in Japanese bonds. This marked the most significant selling of Japanese bonds in 14 months and represented a major policy shift by the BOJ. Despite the large-scale sell-off, Japan's benchmark bond yields ended the week lower, indicating the complex market reactions to the BOJ's policy adjustments. Market strategists are now closely watching for further rate hikes and monitoring the yen's weakening for future investment strategies.

Japanese Equities Surge Despite Foreign Selling

Despite the heavy selling by foreign investors before the BOJ's rate hike, Japanese equities, including the Topix and Nikkei 225, have continued to climb, reaching levels not seen since 1989. This resilience and growth potential are attributed to fundamental reforms in Japan's corporate culture, including increased dividends and buybacks, and strategic government initiatives. Additionally, there has been a noticeable shift among Japanese households towards equities, with stock assets up 29.2% year-on-year, supported by government reforms like the Nippon Individual Savings Account (NISA).

Challenges and Global Implications

While Japan's equity market is experiencing a historic rally, the country faces significant fiscal challenges, with public debt at 260% of its GDP. The shift from negative interest rates and the end of ultra-loose monetary policy mark a critical juncture for Japan's economy. These developments underscore the need for careful fiscal management and highlight the potential risks to global financial stability posed by unchecked fiscal expansion.