Data from Japan’s Ministry of Finance shows that for the week ending June 20, foreign investors sold more Japanese stocks than they bought, with a net sale of ¥524.3 billion. This marks the end of an 11-week period of consistent buying. During those weeks, foreign investors purchased a total of ¥7.236 trillion worth of Japanese equities. The recent selling wave followed reports of disappointing earnings and worries that stock prices might be too high. This sudden shift indicates a change in how foreign investors view Japanese stocks. The official data reveals a notable retreat from previous buying enthusiasm, especially in light of the massive inflows during the preceding weeks. Over ¥7 trillion was invested in Japanese stocks during that time, making this shift even more striking. The selling trend seems to arise from a mix of economic and psychological factors. Disappointing corporate earnings likely contributed, particularly as expectations may have been too high. When earnings forecasts start to shift downward, investors may quickly reduce their stock holdings. This is common when stock valuations appear stretched and there’s not enough economic support to justify continued buying. In the short term, such a reversal can cause technical imbalances. Large sell-offs by foreign funds often lead to spikes in market volatility, especially in index-related options. This is especially true if sentiment suddenly worsens without a wider liquidity crisis to stabilize the situation. The current selling trend might lead to a quick drop below important support levels, prompting dealers to adjust their risk exposure mid-week, which generally increases volatility. It’s also essential to observe the impact of these trends on investor positioning. Rapid decreases in long-term exposure can lead to the unwinding of hedges associated with that exposure. This can cause temporary distortions in volatility metrics and may reduce skew premiums, particularly during quieter summer trading. Such unwinding usually cascades through structured products, leading to non-linear price moves tied to automatic barrier levels, increasing volatility from positioning shifts rather than panic. Traders focusing on dispersion should keep an eye on the differences among index components in the upcoming sessions. If there continues to be widespread selling while domestic investors remain inactive, spikes in correlations could influence both basic delta strategies and more complicated volatility trades. While some may respond by buying simple puts or engaging in gamma scalping, we recommend first examining any re-steepening in skew surfaces, particularly on the upside if there’s a shift towards value-oriented picks. As the earnings season continues, it might be beneficial to review the delta-adjusted exposure across various expiration cycles. Some derivative desks have noted increased activity in index options for the next two weeks, suggesting expectations of short-term weakness due to potential earnings disappointments. We should also monitor open interest to determine if new puts are being added or if they are replacing expiring options. In summary, this selling trend by international investors, coming after a long period of steady buying, provides an opportunity to reassess how open risk positions are tied to Japanese stocks. If these flows don’t reverse soon, hedgers and short-volatility players may have to adjust their strategies more rapidly than expected. This reactive behavior could create opportunities, but only if positions are managed with awareness of both asymmetry and speed.

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