Recent data reveals that last week, overseas investors executed the largest net selling of Japanese stock index futures and cash equities since November of last year. This move forms a significant part of a broader risk-off trade, triggered by the full-scale outbreak of conflict between the US/Israel and Iran, which prompted global capital to offload assets in markets like Japan, South Korea, and Taiwan. These markets had seen strong gains year-to-date, contained substantial profit-taking potential, and are heavily reliant on energy imports from the Middle East.
According to Japan Exchange Group, in the week starting March 2nd, foreign investors sold approximately 983.5 billion yen in Japanese stock index futures. This brought the combined net selling of futures and stocks to about 745.7 billion yen, marking the highest level in four months. Conversely, the cash equity segment surprisingly recorded a net purchase of approximately 237.8 billion yen. This suggests that amidst the sharp market sell-off following the US and Israeli strikes on Iran, some bargain-hunting emerged, betting on a swift resolution to the conflict.
The significant escalation of Middle East tensions and a sharp spike in international oil prices, which approached $120 per barrel, have dampened global investor risk appetite, placing heavy selling pressure on Japanese stocks. Japan relies on the Middle East, particularly regions around the Strait of Hormuz, for over 90% of its oil and natural gas resources. Conflict in the Middle East and soaring oil prices directly and substantially impact its terms of trade, corporate costs, and consumers' real purchasing power.
Since the outbreak of the Iran conflict, the Nikkei 225 index has fallen sharply by 7.5%, significantly underperforming the S&P 500, which declined by only 1.5% over the same period. The core rationale behind this foreign capital flight from Japanese assets is not a long-term pessimistic narrative of "foreign investors turning bearish on Japan," but rather a classic wartime risk-off reaction—selling risk assets like stocks and flocking to safe havens like the US dollar—compounded by Japan's high exposure to Middle Eastern energy, triggering a futures-led de-risking trade. The net inflow into Japanese cash equities itself indicates this is more akin to "using futures for rapid risk reduction while selectively bargain-hunting in the spot market," rather than an indiscriminate full-scale retreat from Japanese stocks.
The AI investment boom, coupled with fiscal stimulus led by the Sanae Takaichi government, is likely to soon drive a rapid return of foreign capital, potentially resuming the Nikkei's record-breaking trend seen in recent years. The Japanese government has elevated "AI computing power + semiconductor supply chain rebuilding" to a national strategic level. It has set a goal to increase domestic chip sales to 40 trillion yen annually by 2040, a fivefold increase from the current 8 trillion yen. Simultaneously, TSMC, the global leader in chip foundry services, plans to advance mass production of 3-nanometer advanced processes in Japan, a move the market views as a crucial signal of Japan's reintegration into the global chip manufacturing chain.
The government is promoting a substantial 21.3 trillion yen fiscal stimulus package and is considering measures like subsidies to cushion the impact of fuel price shocks from the Iran conflict. These policies are undoubtedly positive for domestic demand, capital expenditure, and risk appetite. More importantly, the current bull market in Japanese equities is not solely driven by the AI boom and fiscal stimulus; it is also supported by a confluence of factors including a substantial increase in semiconductor orders, comprehensive corporate governance reforms, the unwinding of cross-shareholdings, expanded share buybacks by listed companies, and significant improvements in Return on Equity (ROE).
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