JPMorgan analysts stated that despite a recent rally that saw Japanese markets recover the majority of their August losses, they were still overweight on the country’s stocks. Fund flow data also indicated some overseas purchasing. Nikkei 225 and TOPIX indices in Japan were trading at their highest points since August 1.
Japan Stocks August Losses
Since the end of July, when the Bank of Japan increased its benchmark interest rate and announced intentions to scale back its bond purchases, the Nikkei 225 and the Topix had both dropped by roughly 9%. After plunging into a bear market on August 5 when losses topped 20%, the benchmarks were currently down about 13% from their records set last month. Earlier in the month, the indexes had fallen to 10-month lows and had entered a bear market. Now that they were trading over 20% above their August lows, both indices were once again approaching record highs reached earlier in the year.
JPM Remains Overweight
Even after cutting its year-end price expectations for both indices by roughly 6% apiece, JPM declared that it was still overweight in Japanese stocks. Trading data for the week of August 5 to 9 revealed that domestic investors and medium to longterm foreign traders were purchasers, particularly when they made bargain purchases into significantly discounted sectors, while short-term foreign investors dumped Japanese positions.
According to JPM, the robust results reported by Japanese companies in the June quarter were mostly attributed to the devaluation of the yen. However, as the carry trade unraveled in August, the yen significantly strengthened. As the Bank of Japan hikes interest rates, the yen may continue to strengthen, which might put further pressure on corporate profitability.
