In reviewing Japan’s just released balance of payments details showing the weekly transactions in Japanese stocks by foreign investors, we were shocked to see that foreign money has headed for the Japanese exits at a rate never seen before, not even in 2008-2009. Could this mark the inevitable “end game” for Japan as it finally recons with it’s unsustainable debt situation with foreign investors fleeing the country so fast they forget to say “Arigato”? It could, but we don’t think so. Rather, previous times of mass movement out of Japanese stocks have typically coincided with some sort of bottom in Japanese equities as a selling climax reallocates capital from weak to strong hands.
In the charts below we show the weekly change in net foreign investment in Japanese stocks. The first chart shows the un-transformed series and here we can see the absolute chucking of Japanese stocks by foreigners that has taken place. The recent selling is nearly 1.5x the peak selling that took place during the 2008-2009 financial crisis. The second chart shows the twelve week moving average of the series, which also points to the most recent selling climax being on par with the one that took place from the Fall of 2008 to the Spring of 2009. Finally, in the last chart we overlay the twelve week moving average of foreign transactions in Japanese stocks on the one-quarter percent change in the Nikkei 225. From this chart we note two things: 1) the rate of change in the decline usually reverses pretty much right in line with foreign selling climaxes and 2) the quarterly declines are usually followed by substantial quarterly increases.
The above analysis has us thinking long and hard about the potential opportunity in buying Japanese stocks when no one else wants them. We are not saying that the selling pressure has ended, but that previous bouts of negativity of this magnitude are very rare and have usually resulted in higher prices in the intermediate term.