Japan¡¯s record share market rally earlier this year is looking like a distant memory as foreign investors sell off stocks in a sluggish economy.

Citigroup and Abrdn are among banks that have turned more pessimistic toward the nation¡¯s equities as the outlook for corporate governance reform and the Bank of Japan (BOJ)¡¯s monetary policy remains uncertain. A fund manager survey by Bank of America showed about a third of respondents believe the market has peaked.

Foreign investors, who helped push up Japanese shares to a record high just a few months ago and beat overseas peers, became net sellers for a fourth straight week through June 14. That was the longest streak since September, according to Tokyo Stock Exchange (TSE) data.

Japan¡¯s blue-chip 225-issue Nikkei stock average index has stalled since reaching an all-time high on March 22. It has dropped 5.6% since then, compared with a 1% gain during the period for the MSCI AC Asia Pacific Index, and a 4.4% advance in the U.S.¡¯s surging S&P 500 Index.

¡°The early optimism for Japanese stocks this year is clearly hitting a speed bump,¡± said Hebe Chen, an analyst at IG Markets. ¡°Investors face the soul-searching question of whether the drivers for Japanese stocks are sustainable.¡±

Factors that supported Japanese shares earlier are starting to drag on the market. Foreign investors that flooded in, attracted by Japan¡¯s unprecedented push to improve shareholder value, are now selling, unloading a net ?250 billion ($1.6 billion) worth of Japanese stocks in the week ended June 14, according to TSE data.

Japanese equities are facing ¡°a material risk of correction,¡± and it¡¯s likely to take a while before positive factors emerge, according to Citigroup analysts including Ryota Sakagami.

Investors are becoming wary about the yen¡¯s relentless slide. In the past they welcomed the weak currency as a boon for exporters, but the degree of the yen¡¯s recent drop has put the focus on how it may harm Japan¡¯s economy, including by boosting inflationary pressure.

The yen depreciated on Friday to approach ?160 per dollar, a level it hasn¡¯t touched since April, prompting Japanese currency officials to warn against excessive foreign exchange moves.

¡°We would like to see some floor in terms of the weakening trend¡± of the yen, and that may benefit the domestic economy, JPMorgan Asset Management¡¯s Aisa Ogoshi said.

Despite the recent sluggishness of shares though, several strategists including those at BlackRock and Morgan Stanley remain positive on Japan¡¯s long-term outlook, citing structural changes including corporate reforms, domestic investments and wage growth.

Investors will be closely watching whether the BOJ pushes ahead with its second interest-rate hike in July after lifting rates for the first time since 2007 in...