Toshiba's accounting irregularities and the debate over controversial security bills have made Western investors think twice about investing in Japanese stocks.
The book-padding has global investors worrying that Toshiba may be the tip of the iceberg. International investors, who are critical of inefficient companies that cling to outdated practices, are becoming increasingly skeptical about whether a new corporate governance code and other efforts will really help change Japan Inc.'s clubbiness.
And now that the defense bills have come under hot debate, Prime Minister Shinzo Abe's approval ratings are tumbling. The situation is adding to investors' concerns.
Investing in Japanese stocks has been supported by a continued rise in stock prices, partly thanks to government stability. But Abe's latest approval ratings seem to be undermining that stability.
Pension funds and other institutional investors that like to hold on to the stocks they buy are becoming increasingly cautious about investing in Japanese shares.
Meanwhile, hedge funds are beginning to sell yen for dollars in the foreign exchange markets, with a target exchange rate of around 127 yen. They are constructing portfolios on the assumption of a U.S. rate hike in September; Fed Chair Janet Yellen as much as signaled this move last week while testifying in front of Congress.
These funds have adopted a volatility-focused stance, buying Japanese stocks only when stock prices wildly gyrate due to political and other factors.
Generally, foreign investors have been little involved since Japanese stocks began going back up, after Greece's debt crisis and China's stock crash looked to have been solved. But global investors, it seems, remain risk-averse. Although some market watchers say the two risks have faded, questions remain regarding a snap election in Greece and how far China's price-keeping operations can go.
For the time being, market attention is focused on how much longer Japanese stocks can continue their upswing in the near absence of global investors.
Itsuo Toshima is an independent investment adviser based in Tokyo and the former Japan representative of the World Gold Council.