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Foreign buying overrides domestic selling to lift Nikkei

But recent wobble suggests hedge funds starting to take profits

The Nikkei Stock Average has marched steadily upward to post-bubble highs over the past few weeks.

TOKYO -- Steady buying by overseas investors has driven the recent rally in Japanese stocks, with domestic contrarians pulling in the other direction, though sharp market swings Thursday hint that a shift may be underway.

Overseas investors were net buyers of Japanese stocks and futures for eight straight weeks through Nov. 2, to the tune of 5.4 trillion yen ($47.5 billion), data released Thursday by Japan Exchange Group shows. Markets were closed Nov. 3 for a holiday.

The trend began the week ended Sept. 15, stemming mainly from hedge funds and other speculators covering short positions in futures. With tensions over North Korea easing at the time, "hedge funds said they'd lost their reason for selling Japanese stocks," said Eiji Uejima of Daiwa Capital Markets Hong Kong.

After the short-covering ran its course in late September, overseas long-term investors came to the fore with trades based on corporate earnings, confirming companies' first-half performance with the wave of earnings releases that began in late October. Semiconductor-related names and machine-tool makers in particular benefited from the trend.

Japanese stocks still look cheap from a global perspective, argues Andy Brown of British investment firm Baillie Gifford.

Japanese investors, meanwhile, have been selling almost uniformly, with the exceptions of corporate share buybacks and the Bank of Japan's purchases of exchange-traded funds. Japan's traditionally contrarian retail investors have been selling to take profits since the Nikkei average neared 20,000 in mid-September. Individual investors sold 2.4 trillion yen more in stocks and futures than they bought over the eight weeks through Nov. 2.

Trust banks -- which reflect moves by pension funds -- were also net sellers, though their total came to a more modest 480 billion yen. The enormous Government Pension Investment Fund, having largely reached its target weighting of 25% for Japanese equities, is now selling into strength and buying into weakness as well.

But this pattern of overseas buying and domestic selling is showing signs of changing, among them Thursday's 859-point swing in the Nikkei Stock Average -- a reminder that rallies led by foreign investment can end abruptly. For the gains to continue, domestic investors will need to pivot from profit-taking to buying.

Thursday's moves reflected the diverse array of foreign participants in the Japanese market. As the Nikkei average broke 23,000 for the first time in some 26 years that morning, market-watchers speculated that global macro hedge funds, which base their strategies on countries' macroeconomic conditions, were buying futures.

Though the benchmark index slumped as far as 391 points below Wednesday's close in the afternoon, it regained most of this ground and ended the day down only 0.2%. 


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