Foreign investment in Japanese stocks saw a significant boost in December, shifting from a net outflow of ¥1 billion to a net inflow of ¥124.9 billion. This surge reflects growing confidence in the Japanese market, driven by economic recovery and stable financial conditions. Investors are attracted to the favorable valuation of Japanese stocks compared to those in other major markets. This trend could provide support for Japan’s stock market, despite challenges like fluctuating global demand and domestic economic policies.

Positive Economic Outlook

The increase in foreign investment bodes well for Japan’s economic outlook, potentially leading to more stable market conditions in the future. Back in late 2024, we noted a surge in foreign investment that contributed to strong market performance throughout much of 2025. However, this optimism has recently turned cautious. The latest data from the Ministry of Finance reveals that foreign investors were net sellers of Japanese cash equities last week, marking a significant shift from the steady inflows that helped push the Nikkei 225 index above 42,500. Currently, the market is more focused on the specific actions of the Bank of Japan. With core inflation remaining above the 2% target for over a year, many are speculating that a change in the negative interest rate policy may happen soon. This speculation has caused the Nikkei Volatility Index to rise to 19.2, indicating that traders expect larger market fluctuations in the weeks ahead.

Considering Market Strategies

In light of this uncertainty, we should explore strategies that can benefit from increased movement in the Nikkei 225. Buying option straddles or strangles ahead of the upcoming central bank meeting could be a smart approach to prepare for major price changes, regardless of the direction. For those who have a specific market bias, purchasing puts could hedge against a downturn if the policy change is more aggressive than anticipated. The currency market is also crucial; the yen’s weakness provided a significant boost to corporate profits in 2025. The USD/JPY is currently around 155, but any clear indication of policy tightening from the Bank of Japan could lead to a swift strengthening of the yen. Considering USD/JPY put options could be a strategy to hedge or speculate on this potential currency shift. Create your live VT Markets account and start trading now.

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