How will the Japanese stock market move after a sharp decline? Analysts' perspectives

According to Zhitong Finance, the Japanese stock market experienced its worst day since 1987, with both the TOPIX index and the Nikkei 225 index falling into bear market territory. Against the backdrop of a soaring yen, tightening monetary policy by the Bank of Japan, and concerns about the U.S. economy, investors have been withdrawing capital and fleeing; additional margin calls have forced retail investors to sell, exacerbating the stock market plunge. In this context, UBS Securities has lowered its target level for Japanese stocks by the end of the year. Nevertheless, several asset management companies remain optimistic about the outlook for the Japanese stock market.

Analysts have analyzed the selling on Monday in the Japanese stock market:

Sellers

Rina Oshimo, Senior Strategist at Okasan Securities, stated that the selling was driven by the unwinding of long positions and the participation of trend-following hedge funds. Due to the panic selling in the market, valuation and fundamental strategies are not applicable in certain areas.

Takehiko Masuzawa, Director of Japanese Stock Trading at Phillip Securities, pointed out that futures participants such as CTAs are accumulating and selling off their long positions, opening up opposite positions.

Kyle Rodda, Senior Market Analyst at Capital.Com, believes that the rapid fluctuations in the yen have brought downward pressure on the Japanese stock market, but it has also led to the unwinding of a major carry trade - investors were previously borrowing yen to purchase other assets, mainly U.S. tech stocks, thereby increasing leverage.

Reasons for Selling 1: Yen and the Bank of Japan

Rafael Nemet-Nejat, Senior Portfolio Manager at Jin Investment Management, stated: "This is a massive deleveraging event that is unfolding, triggered by the Bank of Japan's rate hike and the possibility of a rate cut by the Fed in September, leading to a significant unwinding of carry trades. As a result, many trades betting on a weak yen and a soft landing were forced to unwind. These fluctuations are extreme, especially in crowded long markets."

Tim Morse, Analyst at Asymmetric Advisors, pointed out: "All of this is being driven by the appreciation of the yen - the USD/JPY pair plummeted from 145 to 142, suggesting that a further break of technical levels seems imminent."

Reasons for Selling 2: U.S. Economy

Jumpei Tanaka, Strategist at Pictet Asset Management, noted: "Last Friday, the U.S. announced an increase in the unemployment rate to 4.3%, triggering the 'Sam Rule' and raising concerns about a U.S. economic recession, which adversely affected the Japanese stock market. Currently, the U.S. Economic Surprise Index is showing a negative (deteriorating) trend, intensifying investor concerns about the deterioration of U.S. economic indicators. In addition, the Jackson Hole meeting will be held this month, and the Federal Open Market Committee meeting will be held next month."

Hideyuki Suzuki, General Manager at SBI Securities, stated: "The U.S. employment statistics further added to the uncertainty about the U.S. economy, coupled with the continued strength of the yen, leading to a sharp market decline." Prospects

After the "Black Monday" in the Japanese stock market, UBS warned that the selling pressure on Japanese stocks is far from over, and investors should not rush to "catch the falling knife" in the short term. UBS strategists, including Nozomi Moriya, stated in a report that due to the strengthening of the Japanese yen, reflecting new GDP and CPI forecasts, they have lowered their targets for Japanese stock indices. By the end of 2024, the target for the TOPIX index was lowered from 3000 points to 2800 points, and the target for the Nikkei index was lowered from 42000 points to 39000 points. The target for the TOPIX index by the end of 2025 was lowered from 3200 points to 3000 points, and the Nikkei index was lowered from 44000 points to 41000 points. The target adjustments reflect changes in the Bank of Japan's monetary policy and trends in foreign exchange, among other factors.

Nevertheless, James Salter, Chief Investment Officer of Zennor Asset Management, believes, "Our short-term concerns will not affect our long-term optimism about changes in Japanese capital allocation. We do not expect this to fundamentally impact Japan's competitiveness or profitability."

Hiroshi Namioka, Chief Strategist at T&D Asset Management, stated, "With increased volatility, the market may face challenges in the coming days, but a rebound may occur later this week."

Rupal Agarwal, Asia Quantitative Strategy at Sanford C. Bernstein, said, "We are currently in a phase where bad news is just bad news. Please note that for Japan, we have been advising to focus on quality stocks and increase exposure to domestic Japanese stocks since the beginning of this year, so this sell-off does not change our view. From a long-term perspective, we remain positive on Japan's structural issues."