Wall Street banks warn: Leading stocks in Japan could face selling pressure in the near term, according to strategists from Wall Street banks Morgan Stanley and JP Morgan. 

These analysts, relying on statistical models, suggest that overcrowded long positions in liquid and large companies may prompt a sell-off.

The surge in Japan's top-performing stocks has been driven by overseas investors favoring large-cap stocks and following benchmark index products, inflating values of popular sectors like semiconductors and banks. 

However, the excessive concentration of long positions, particularly among trend-following traders, raises concerns of a market correction.

Despite the record highs reached by Japanese stocks this month, with the Nikkei index surpassing its 1989 peak, indicators point to potential headwinds. 

Trend-following commodity trading advisors (CTAs) have started reducing their long positions in Nikkei 255 futures, indicating a shift in sentiment.

Morgan Stanley observed a moderation in the performance of large-cap Japanese stocks in March, with momentum stocks in sectors such as semiconductors, automobiles, and financials potentially facing short-term challenges in April.

While certain sectors have witnessed notable` gains, analysts caution that valuations are becoming stretched. 

The Nikkei's 12-month forward price-earnings ratio is currently elevated, suggesting that Japanese companies may be overpriced compared to historical averages and international benchmarks like the S&P 500.

(With Reuters Inputs)