Foreign Selling Nearly Stops
We are seeing a significant change in foreign investor behavior, with the massive selling of Japanese stocks coming to an almost complete halt. The flow shifted from a net outflow of over ¥1.7 trillion to nearly flat, which indicates the intense downward pressure on the market is easing. This is the most abrupt slowdown in selling we have seen in over a year. This shift comes as the Nikkei 225 has pulled back to around the 39,500 level after touching record highs earlier in the year. The exhaustion of sellers at this technical level suggests a potential bottom may be forming for the index. We believe this provides a floor for the market in the near term. The change in sentiment is supported by recent economic data and central bank commentary. The Bank of Japan’s meeting last week signaled a pause after the policy normalization we saw through late 2025, calming fears of an aggressive tightening cycle. With February’s core inflation holding steady at 2.1%, investors now see less reason to flee Japanese equities. When we looked at the market in the fourth quarter of 2025, the primary driver for outflows was the fear of rapid interest rate hikes hitting corporate profits. This new data suggests that the worst of those fears have now been priced into the market. The panic has subsided, creating a new environment for us to trade in. For derivative traders, this means we should consider shifting from a bearish or neutral stance to a cautiously bullish one. We can look at buying April Nikkei 225 call options or selling out-of-the-money put spreads to capitalize on a potential rebound. The sharp reduction in selling removes a major headwind for the market heading into the second quarter.Implications For Q2 Trading
Furthermore, market volatility is likely to decrease from the elevated levels we saw during the sell-off. The Nikkei Volatility Index, which was recently above 20, is showing signs of decline. This makes strategies that benefit from falling volatility, such as selling straddles, more attractive for those expecting a period of stabilization or a gradual move higher. This change also has implications for the currency market, specifically the yen. Reduced foreign selling of Japanese stocks means less yen is being sold to be converted into foreign currency, providing support for the JPY. We could see the USD/JPY pair ease back from its recent highs near 155, making options that bet on a stronger yen a viable strategy. Create your live VT Markets account and start trading now.
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