Japanese investors exit foreign stocks at fastest pace in 5 years

Japanese investors sold foreign stocks at the fastest pace in about five years in May, as the Iran war and concerns that the tech-driven rally had overextended drove a broad risk-off repositioning that pushed the S&P 500 down 2%, Ministry of Finance data show.

The sell-off comes as the Iran conflict, which began in late February, pushed US crude to about $93 a barrel — up from roughly $70 before the war — while keeping the Strait of Hormuz, a waterway handling 21% of global oil trade, effectively closed. The last time oil prices surged this rapidly was during the Russia-Ukraine conflict in 2022, when Brent crude topped $130 a barrel. Higher energy costs have raised input prices across industries and made companies reluctant to hire, even as the US economy added 172,000 jobs in May, roughly double what forecasters had expected, the Labor Department said. The previous two months were revised up by a combined 93,000 jobs, showing a labor market that remains resilient despite the geopolitical headwinds.

The capital outflow from Japan coincided with a broad sell-off in global equity markets. The S&P 500 fell 2% to near 7,427 on Friday, its worst day since October, while the Dow Jones Industrial Average slipped 0.9% to about 51,094. The Nasdaq Composite sank 3.5% to about 25,893 as big technology stocks led declines, with Nvidia and Broadcom among the heaviest weights on the market. The benchmark US 10-year Treasury yield surged 7 basis points to 4.553% after the strong jobs report boosted expectations that the Federal Reserve may need to hike interest rates this year. In Asia, South Korea's KOSPI tumbled 5.5% to 8,160.59, with tech heavyweights SK Hynix and Samsung Electronics losing 9.9% and 6.4%, respectively, as traders tracked Nvidia CEO Jensen Huang's scheduled visit to the country. Japan's Nikkei 225 slipped 1.3% to 66,588.12 even as official data showed real wages rose for a fourth straight month, showing the tension between domestic economic strength and external risk aversion.

Japanese investors are among the largest cross-border equity buyers globally, and a sustained pullback from foreign stock purchases could depress demand for US and international equities, adding selling pressure to already stretched tech valuations. If the Iran conflict persists and tech valuations continue to compress, Japanese capital outflows may accelerate, potentially triggering broader repositioning among global institutional investors.

Gold Rises as Safe-Haven Demand Intensifies

The geopolitical uncertainty has also boosted demand for safe-haven assets. Gold prices have climbed as central banks increase purchases, with Newmont Corp., the world's largest gold miner, reporting first-quarter revenue surged 45.85% year-over-year to $4.6 billion. The company generated strong free cash flow of $1.2 billion and announced a $6 billion share repurchase program, reflecting the favorable pricing environment for precious metals during the conflict. Newmont's operating cash flow rose 160.91% year-over-year, showing the margin expansion gold miners are capturing as bullion prices rise.

Cross-Asset Transmission and the Fed Outlook

The transmission chain from geopolitics to markets is visible across asset classes. Oil prices remain elevated near $93 to $95 a barrel, fueling inflation concerns that complicate central bank policy decisions. The strong US jobs report — 172,000 new positions in May, with prior months revised up by 93,000 — has reinforced expectations that the Fed may need to raise rates, a move that would further strengthen the dollar and potentially accelerate capital outflows from riskier markets. "Inflation is being nudged higher by a broader array of forces than just the Iran war," said Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research. "Look for prices to stay higher for longer." Markets in Europe were broadly higher, with Britain's FTSE 100 gaining 0.5%, Germany's DAX up 0.2% and France's CAC 40 adding 0.6%, while Hong Kong's Hang Seng declined 1.2% to 24,961.95 and the Shanghai Composite lost 0.7% to 4,027.74.

This article is for informational purposes only and does not constitute investment advice.