Foreign investors turned net sellers of Japanese equities last week for the first time this year, driven by growing concerns that rising oil prices could negatively impact Japan's economy. According to data from Japan Exchange Group, overseas investors sold a net 491 billion yen (approximately $3.1 billion) in Japanese cash equities during the week ending March 13, marking the largest weekly net selling since September of last year. This sell-off ended a nine-week buying streak that had been primarily fueled by optimism surrounding the fiscal expansion policies of Prime Minister Sanae Takaichi.

With fears mounting that surging oil prices due to conflict involving Iran could exacerbate inflation and weigh on corporate earnings, the outlook for Japanese equities has dimmed. Japan relies on the Middle East for over 90% of its oil imports, and its industrial supply chains are heavily dependent on naphtha from the region. Naoya Oshikubo, Chief Market Economist at Mitsubishi UFJ Trust and Banking, noted, "Many investors view Japan as one of the economies most vulnerable to rising oil prices. That is why Japanese stocks are underperforming."

After climbing 17% in the first two months of the year, the Nikkei Index has fallen 9.3% since the outbreak of hostilities involving Iran, while the S&P 500 declined 3.7% over the same period. On Thursday, the Bank of Japan decided to keep interest rates unchanged and added the Middle East conflict to its list of risk factors. Bank of Japan Governor Kazuo Ueda indicated that he expects higher oil prices to exert upward pressure on Japanese inflation.

Oshikubo added that investor caution has intensified in recent days ahead of a scheduled meeting between Prime Minister Takaichi and former U.S. President Donald Trump in Washington on Thursday. "Investors are concerned about potential difficult negotiations with Trump regarding his order to deploy naval forces to the Middle East," he said.