Profit-taking combined with the Federal Reserve's hawkish stance has led Japanese investors to sell off overseas stocks and bonds in large quantities!

Japanese investors massively withdrew from overseas stock and bond markets in the week ending November 1, choosing to lock in profits from previous market gains after hawkish signals from Federal Reserve officials.

On November 7, data released by the Japanese Ministry of Finance showed that Japanese investors net sold 581.1 billion yen (approximately 3.85 billion USD) of foreign stocks that week, marking the largest single-week sell-off since October 4. At the same time, they also reduced their holdings of long-term foreign bonds by 354.4 billion yen and short-term bonds by 798.7 billion yen.

This wave of selling coincided with hawkish remarks from Lorie Logan, President of the Dallas Federal Reserve, who stated last week that the Federal Reserve should not cut interest rates in October or again in December, citing a "balanced" labor market and the possibility that inflation could remain above the policymakers' 2% target for an extended period.

This is the largest overseas asset sell-off by Japanese funds in nearly a month, highlighting the caution of investors from the world's second-largest creditor nation regarding the outlook for U.S. monetary policy.

In contrast, foreign investors have net bought Japanese stocks for the fifth consecutive week, purchasing approximately 690.1 billion yen of domestic shares. The MSCI World Index has fallen 1.6% so far this week, on track for its first weekly decline in four weeks.

Profit-taking combined with hawkish Fed comments triggers risk aversion

The latest statements from Federal Reserve officials have become an important catalyst for Japanese investors to adjust their overseas allocations.

Dallas Fed President Lorie Logan emphasized that the current labor market is balanced and that inflation is expected to remain above the 2% target for a prolonged period, which dampened market expectations for a rate cut in December.

Analysts pointed out that Japanese investors have historically been sensitive to interest rate outlooks, especially in the context of a potentially tightening global liquidity environment. Hawkish comments not only affect investment decisions regarding U.S. assets but also prompt investors to reassess the risk-reward ratio of their overseas asset portfolios.

In addition to the uncertainty surrounding Federal Reserve policy, the motivation for profit-taking is also significant. The market had previously experienced a strong rally, providing investors with an opportunity to lock in profits.

Data shows that Japanese investors not only significantly reduced their holdings of foreign stocks but also exhibited a clear retreat in the bond market.

In addition to net selling 354.4 billion yen of long-term foreign bonds, the scale of short-term bond sales reached 798.7 billion yen, indicating a comprehensive cautious attitude towards overseas fixed-income assets.

Foreign investors net buy Japanese stocks for the fifth consecutive week

In stark contrast to the sell-off of overseas assets, the Japanese domestic market continues to attract foreign capital inflows. Foreign investors have net bought Japanese stocks for the fifth consecutive week, with purchases totaling approximately 690.1 billion yen, reflecting sustained confidence in the Japanese market.

However, the Nikkei 225 index has still fallen about 5% so far this week, with technology stocks facing significant losses, reflecting the transmission effects of global market adjustments on the Japanese market.

In the bond market, after experiencing net outflows from foreign capital for two consecutive weeks, Japanese long-term bonds regained approximately 280.6 billion yen in foreign capital inflows. Foreign investors also significantly purchased Japanese short-term debt instruments worth 1.83 trillion yen, indicating a preference for yen-denominated assets This cross-border capital flow pattern highlights the delicate balance in the current market: Japanese investors are choosing to withdraw from overseas risk exposure amid rising global uncertainty, while foreign capital views the Japanese market as a relatively safe haven.