Hedge Funds Sell Japanese Stocks, But Short-term Plunge Unlikely

TradingKey - According to the latest report from Goldman Sachs, global hedge funds offloaded Japanese stocks at the fastest pace in nearly two and a half months last week, ahead of Japan's election results. 

Despite some reduction in holdings, hedge funds still hold positions in Japanese stocks that exceed their weight in the MSCI Global Index by 0.6 percentage points, indicating a continued reliance on Japanese equities.

On Monday local time, even though the ruling coalition suffered a significant defeat in the Senate elections, Nikkei 225 futures edged higher, and the yen appreciated slightly. Analysts suggest that this indicates the election outcome has been fully priced in by investors, implying that the downside potential for Japan's financial markets may be limited in the short term.

Nikkei 225 futures trend, source: investing.com

USD/JPY trend, source: TradingKey

However, from a long-term perspective, analysts caution that the election results might not bode well for Japanese assets, as political uncertainty could undermine their long-term appeal. 

Additionally, the looming deadline of August 1st for US-Japan tariff negotiations is another focal point for the market. Analysts warn that a lack of progress in these talks could exacerbate the situation, leading to continued volatility for Japanese assets.

This month, the Nikkei 225 Index and the TOPIX Index have declined by 1.7% and 0.6%, respectively, underperforming global indices.