In a seismic shift for Japan’s equity markets, the recent plunge has left investors reeling. A perfect storm of factors, including a surging yen, tighter monetary policy, and a gloomy US economic outlook, has triggered a massive sell-off, with both the Topix and Nikkei 225 Stock Average plummeting over 7% in just three days. This nosedive threatens to push them into bear market territory, a stark contrast to the record highs just reached last month.
Exporters have been hit hard by the yen’s rapid 2% appreciation against the dollar, while banks have suffered from a 13-basis-point drop in 10-year government bond yields. The aftermath of the Bank of Japan’s interest rate hike on July 31 has triggered a yen surge that has cast a shadow over the earnings outlook for exporters. This has forced investors to unwind carry trades funded by the yen, disrupting the once-popular strategy in emerging markets.
Even sectors like insurers and banks, which were expected to benefit from higher rates, are now reeling from the global equity sell-off. Mitsubishi UFJ Financial Group saw its shares plummet by a staggering 21%, reflecting the widespread pain felt across the market. Signs of weakness in the US economy, such as disappointing nonfarm payroll numbers and a climbing unemployment rate, have only added fuel to the fire.
Foreign investors have been quick to offload Japanese equities, with a net sell-off of ¥1.56 trillion ($10.7 billion) in cash equities and futures in the last week of July. This has led to a significant reset in expectations for Japan equity returns for the remainder of the year, according to market experts.
Despite the turmoil, experts like Rina Oshimo from Okasan Securities believe that Japanese stocks will eventually stabilize alongside the US market. Vishnu Varathan, head of economics and strategy at Mizuho Bank, sees a convergence of “risk off” triggers from the Bank of Japan and the Fed as contributing to the market downturn. Hideyuki Suzuki from SBI Securities predicts that further interest rate hikes from the BOJ are unlikely given the current pace of stock price declines, while Jumpei Tanaka from Pictet Asset Management cautions against aggressive buying until the bottoming out of USD/JPY is confirmed.
As market participants grapple with these unprecedented challenges, the Extreme Investor Network remains committed to providing timely insights and analysis to help investors navigate these turbulent times. Stay tuned for more updates as we continue to monitor the evolving financial landscape.