Japanese equities experienced a significant downturn at the beginning of August, shedding $1.1 trillion in value over a record three-day loss. Despite this, bullish investors see this as an opportunity to buy into what has been one of 2024’s hottest trades. The stocks that were hit the hardest were those that had previously soared to high levels, bringing prices down to more attractive levels. This has led to a valuation improvement campaign that has increased the international appeal of Japanese shares, with some of the froth being removed from the $6.1 trillion market.
The Bank of Japan’s unexpected interest rate hike last month caught traders off guard, but the central bank has since reassured the market that it will not tighten too quickly to avoid further turmoil. This has helped to stabilize sudden gains in the yen, which in turn removes a key threat to the stock rally. Additionally, global catalysts such as positive US labor-market data and major technology companies investing in artificial intelligence infrastructure have contributed to easing concerns about a potential recession.
Tetsuro Ii, chief executive of Commons Asset Management Inc., believes that the market will likely take two to three months to fully recover. Investors are recognizing that monetary policy in Japan and the US has entered a new stage, prompting them to exit crowded positions. The benchmark Topix has fallen by 12% since the end of June, with stocks that had previously outperformed suffering more significant losses. Semiconductor-related stocks, which were a driving force behind this year’s rally, have fallen by 25%, while bank stocks, which surged in anticipation of higher rates, are down by 16%.
Despite the recent slide, Japan remains a favorite market for global traders due to expectations of inflation returning and Japanese companies increasing shareholder returns. The lower stock prices may make Japanese equities even more attractive to overseas investors, such as Warren Buffett, who has been investing in Japanese trading houses. The Topix is currently trading at 13 times estimated forward earnings, compared to 20 times for the S&P 500 Index, making it a potentially appealing investment opportunity.
The derivatives market indicates positive sentiment towards Japan, with open interest in bullish Nikkei calls rising faster than bearish puts. This suggests that bets on a market rebound are becoming popular. However, there are still risks to consider, such as the yen strengthening as the BOJ tightens further and the Fed eases, as well as ongoing geopolitical tensions between the US and China.
Overall, while the recent turbulence in the Japanese equities market was not entirely unexpected, it has created opportunities for investors to potentially capitalize on undervalued stocks. With various pressures on a market at elevated levels, it will be interesting to see how investors navigate the current landscape and whether they will continue to be bullish on Japanese equities despite the recent downturn.