After nearly three months of uninterrupted gains, foreign investors finally pulled back from Japanese stocks. The ¥524.3 billion ($3.6 billion) net outflow in the week ending June 21 might look like a blip on the chart, but make no mistake, it is a red flag.

It is not a crisis or a collapse; it is a crystal-clear signal that the risk appetite is cooling and the smart money is getting defensive.

Is there any reason why this is happening now?

The answer to that is simple: energy insecurity, inflation, and central bank equals confusion and volatility.

Japan imports nearly all its oil, and the Israel-Iran ceasefire, while calming headlines, hasn’t erased the very real risk of supply disruptions. And with Japan’s core inflation now at a two-year high, the specter of the Bank of Japan stepping off the gas is real. Rate hikes are back on the table, and that changes everything.

Let’s be blunt: Japan’s recent market boom was built on easy money, a weak yen, and a flood of foreign capital chasing undervalued assets. But those tailwinds are shifting. The U.S. is threatening trade friction, inflation is biting, and the BoJ can’t play the dove forever.

Still, the bulls will say, “Hey, foreigners have still pumped ¥6.81 trillion into Japanese stocks this quarter!” True. But that was the momentum trade. What we’re seeing now is a strategy shift.

Look deeper: foreign investors are dumping long-term Japanese bonds and piling into short-term bills. That’s some good old hedging. Meanwhile, Japanese investors are ditching foreign equities and moving into global bonds. Everyone’s seeking shelter, and that’s not a bullish sign.

Japan is not broken, but the easy gains are over. If you’re still chasing this rally blindly, you’re late. Real investors are already repositioning. You should be, too.