1、 Overview of the Japanese stock market at the beginning of this month

At the beginning of this month, the Japanese stock market experienced its worst sell-off in years, with foreign investors selling a large amount of futures while buying cash stocks. For some people, this is a good sign that more stable funds have not lost confidence in the market.

2、 Different operations and reasons of foreign investors

In the first week of August, foreign investors sold a total of 777 billion yen (approximately 5.28 billion US dollars) on Japanese stocks (including cash stocks and futures). Most of them are futures, which is the most liquid tool in the market, selling about 1.273 trillion yen, the largest selling volume since October last year. But foreign investors also became net buyers of cash stocks in the same week, buying nearly 500 billion yen, the most in four months.

This dynamic may represent different viewpoints in the market. Those who have responded to concerns about the Bank of Japan's interest rate hike and the US economic slowdown are mainly selling futures from a short-term perspective, "said Naoki Fujiwara, a senior fund manager at Xinjin Asset Management. Investors who are concerned about market valuations and fundamentals are buying and may have a positive view of inflation in Japan

3、 Sales situation of different futures products

Data from the Japan Stock Exchange Group (JPX) supports this viewpoint. Sales are mainly focused on Nikkei Index futures, which short-term investors prefer because they are more volatile than the broader CSI Index futures, with a selling amount of 833 billion yen. This is the highest value since March 2023, when some investors sold off after concerns about a major financial crisis sparked by the collapse of Silicon Valley Bank and Credit Suisse Group.

In contrast, the selling volume of the CSI index futures was slightly less than 600 billion yen, making it the fifth largest selling volume since the collapse of Silicon Valley Bank.

Market participants indicate that many long investors who want to hedge risks are more inclined to sell the CSI Index futures because their investment portfolios are based on the CSI Index. The Nikkei Index is rarely used as a benchmark because it is a simple price weighted average index, resulting in excessive weighting of stocks including Fast Retailing, Tokyo Electronics Co., Ltd., and SoftBank Group.

4、 The behavior and impact of long-term investors

On the other hand, long-term investors seem to take advantage of the market crash to buy cash stocks at a low price. Nomura Securities' cross asset strategist Yoshitaka Suda said that some people expect the Japanese Government Pension Investment Fund (GPIF) to intervene to rebalance its investment portfolio.

GPIF is currently required to invest approximately 25% of its total assets in stocks. Therefore, a 20% decline in the market will require it to buy trillions of dollars worth of stocks. Data from JPX shows that trust banks, which are seen as proxies for the flow of funds from pension funds, including GPIF, only bought 421 billion yen, indicating that the market may quickly recover as investors attempt to preempt GPIF.

5、 Overall performance and analysis of foreign investors

However, after this month's market crash, foreign investors have become net sellers of Japanese stocks for the first time this year, which may be seen as a sign of their loss of confidence in the country's stocks. As of the first week of August, they sold a total of 1.663 trillion yen worth of Japanese stocks in cash and futures.

However, the sell-off is mainly driven by futures. Since the beginning of this year, investors have sold 5.4 trillion yen worth of futures and bought 3.8 trillion yen worth of cash. This indicates the possibility of short covering. Suda estimates that there are still about 1 trillion yen of short positions in Nikkei index futures. This is much lower than the peak, but it is a positive factor for the market

Editor's viewpoint:

In the fluctuations of the Japanese stock market at the beginning of this month, the different operations of foreign investors in futures and cash stocks reflect the complex emotions of the market and the collision of different investment strategies. Although foreign investors are currently net sellers of Japanese stocks, the sell-off of futures does not necessarily mean a complete loss of confidence in the entire market. In the future, the market trend will depend on various factors, including the global economic situation, the policies of the Bank of Japan, and investors' views on the fundamentals of the Japanese economy. Investors need to closely monitor these factors in order to make wiser investment decisions.

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Noun Explanation:

Nikkei Index Futures: It is a futures contract based on the Nikkei 225 Index, which is favored by short-term investors due to its large price fluctuations. The Nikkei Index is a price weighted average index that gives high weight to certain stocks.

Dongzheng Index Futures: Futures contracts based on the Dongzheng Index. The compilation of the Dongzheng Index can relatively better reflect the overall market situation and is used by many long-term investors as a tool to hedge risks.

Government Pension Investment Fund (GPIF): An important investment institution in Japan that is required to invest a certain proportion of its total assets in stocks, and its investment behavior has a significant impact on the market. When the market falls, buying operations may be carried out to rebalance the investment portfolio.