Reassessment of Japanese Equities
Global investors have turned bearish on Japanese stocks, as recent market volatility forces a re-evaluation of economic prospects. The once-popular strategy of using a weak yen to buy stocks on the Nikkei index is now under scrutiny. The Nikkei had doubled in value since the start of 2023, bolstered by a tumbling yen which enhanced investor returns.
Impact of Yen Fluctuations
The stability of this trade is compromised by sudden changes in the yen's strength, Bank of Japan (BOJ) rate hikes, concerns about corporate earnings in Japan, and fears of a slowdown in the U.S. economy. As a result, bearish bets against Japanese stocks have increased significantly.
Surge in Bearish Trading
The CSOP Nikkei 225 Daily Double Inverse ETF, which allows investors outside Japan to bet against the Nikkei, experienced a surge in trading volume. The average daily turnover reached nearly HK$20 million ($2.57 million), marking a significant increase from the previous week's HK$1 million.
Reduction in Direct Exposure
According to Goldman Sachs, global hedge funds have been withdrawing from Japanese equities at the fastest rate in over five years. Even long-term investors are reducing their exposure, responding to challenges such as the BOJ's quantitative tightening and the strengthening yen, which pose difficulties for Japanese stocks.
Market Sell-Off and Economic Indicators
Last Monday marked the worst one-day sell-off of Japanese stocks since 1987, driven by fears of a potential U.S. recession and an unexpected rate hike in Japan. This led to a significant unwinding of the yen carry trade, which had previously funded the purchase of risky assets, including Japanese equities.
Outlook on Japanese Market
Some analysts suggest that the unwinding of yen carry trades might continue, especially given expectations of yen appreciation. The yen has strengthened from 162 to 142 per dollar, its highest level in seven months. According to Carlos Casanova of Swiss asset manager UBP, improvement in market fundamentals is essential for a positive outlook, which requires better earnings and economic recovery in Japan.
Market Uncertainty and Upcoming Data
Zuhair Khan from UBP notes the increased difficulty in trading Japanese stocks due to unpredictable U.S. interest rate cuts and yen movements. Investors are awaiting crucial economic data from Japan and the U.S. to make informed decisions. As Steven Leung of UOB-Kay Hian highlights, investors are cautious, waiting for data on Japan's economic growth and U.S. inflation before making moves. This wait-and-see approach reflects the market's apprehension about whether the sell-off has concluded.
