Japan's Stock Investors Take Precautions Against Potential Market Declines Amid Ongoing Conflict

Japanese Equities Market Volatility

Key Takeaways:

• The Topix index has shed over 7% since the US-Israeli attack on Iran, making it one of the worst hit markets in the world.
• The Japanese stock market has been on a roller coaster since the start of the war in late February, experiencing sharp gains and losses.

Market Sentiment: Investors are hedging against further downside by using short selling and options to position for sharp drops. The short-selling ratio has increased significantly, with the 20-day moving average rising to around 40%, the highest in almost a year. This is likely driven by the high level of uncertainty surrounding the conflict.

Options Market: Demand for index put options has jumped, particularly for those deep out-of-the-money. This suggests that investors are positioning for sharp falls, with implied volatility for one-month, five-delta Nikkei 225 index put options surging to around 60%, up from around 40% before the Iran attack.

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Retail Investor Sentiment: Margin sell positions have increased two weeks in a row as of March 19, according to data released by the TSE. This suggests that retail investors are starting to turn bearish as the war continues.

Market Outlook: With the level of uncertainty remaining high, it is unlikely that short covering will drive a significant rally in Japanese equities, according to Hiroki Takei, a strategist at Resona Holdings.