Bearish Bets Surge in Tokyo as War Fears Grip Investors

Investors in Japanese equities are increasingly hedging against further market declines, driven by the ongoing conflict in the Middle East. The Topix index has experienced a significant drop of over 7% since the US-Israeli attack on Iran, positioning it among the world's worst-performing markets. This volatility follows a period of sharp gains and losses since late February.

Bearish sentiment is evident through several indicators. The ratio of short-selling to total daily trading has climbed to approximately 40%, the highest level in nearly a year, suggesting a cautious outlook from investors. Demand for index put options, which profit from falling prices, has also surged, particularly for deep out-of-the-money contracts.

Furthermore, margin selling positions have increased for two consecutive weeks as of March 19, indicating growing bearishness among retail investors. Implied volatility for one-month, five-delta Nikkei 225 index put options has risen sharply to around 60%, up from 40% prior to the recent escalation in the Middle East.