Foreign investors made a strong return to Japanese equities in the week leading up to August 10, driven by signals from policymakers aimed at stabilizing markets after recent turbulence led to the steepest single-day drop in Japanese shares since 1987.

According to data from Japan's finance ministry, cross-border investors purchased a net 521.9 billion yen ($3.51 billion) in Japanese stocks during the week, breaking a three-week streak of net selling. This renewed interest came after Japanese authorities indicated measures to curb further declines in the stock market. The Bank of Japan also reassured investors by maintaining its steady interest rate policy, despite the volatility that had gripped global markets.

The dramatic 12.4% plunge in the Nikkei share average on August 5 was largely triggered by fears of a U.S. recession and the unwinding of carry trades funded by cheap yen. However, those concerns dissipated quickly, and the Nikkei has since rebounded sharply, gaining over 20% from its nine-month low of 31,156.12 on August 5.

The optimism was not limited to equities. Foreign investors also reversed an eight-week trend of net selling in Japanese bonds, becoming net buyers last week. They acquired a net 1.44 trillion yen in long-term bonds, the largest purchase since May 11, and 561.8 billion yen in short-term securities.

Japanese investors also showed confidence in foreign markets, with a notable purchase of 1.54 trillion yen worth of long-term overseas bonds, marking their largest weekly net acquisition in 12 weeks. They further invested 453.5 billion yen in short-term foreign instruments.

Meanwhile, on Wall Street, major indexes closed higher on Thursday, buoyed by July retail sales data that highlighted strong consumer spending, alleviating fears of an impending recession.

However, Japanese investors took a more cautious approach to foreign equities, offloading a net 328.1 billion yen in foreign shares after three consecutive weeks of net buying. This move suggests a selective risk appetite as they navigated the global market recovery.