Data suggest foreign retreat from Japan market

Published: February 16, 2006
Overseas investors were net sellers of Japanese shares last week for the first time since September, hightening fears that foreign interest in the Japanese market may have peaked.

Strong buying by foreign investors was the primary reason for the sharp rise in Japanese stocks last year. But in the week ending February 11 foreigners sold a net Y252.9bn ($2bn) in Japanese shares, the highest amount since early June.

They are also likely to be net sellers this week, as figures of of daily orders placed with large foreign securities houses suggest overseas investors have continued net selling every day so far this week.

Foreigners have not been net sellers of Japanese shares for two consecutive weeks since April, before last year's stock market rally began in earnest.

Fears that foreigners may be leaving the market were sparked when Morgan Stanley declared last week that the Japanese equity market rally had come to an end and advised clients to reduce Japan weightings by a third. The market dropped sharply the next day.

Thursday's data from the Ministry of Finance raise concerns that the market may lack of new driving forces. Nervousness that the valuations of Japanese shares may be too high has made the market jumpy since the beginning of this year.

Japanese shares showed a gentle rise on Thursday. But real estate – a sector pushed up sharply over the past year largely by foreign buying – was down 2 per cent on the day by early afternoon.

The Nikkei 225 closed on Thursday morning at 16,044.11, down 4.2 per cent from the end of December – although it still remained 39.7 per cent higher on the beginning of 2005.