Did the Asian financial crisis scare foreign investors out of Japan?

Abstract

Foreigners became net sellers of Japanese equities during the Asian financial crisis in 1997. In this study, I examine whether this shift in aggregate foreign portfolio investment activity in Japan exacerbated the effect of the crisis on markets, or whether it simply reflected positive-feedback trading behavior. The data draws from weekly reports to the Tokyo Stock Exchange (TSE) of aggregate purchases and sales of Japanese equities by foreigners and local institutional and individual investors. I find evidence of consistent positive-feedback trading before, during and after the Asian crisis among foreign investors, while Japanese banks, financial institutions, investment trusts and companies themselves were aggressive contrarian investors. There is no evidence that this trading activity by foreigners destabilized the markets during the crisis.