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Less worries about stock trading

On the 5th local time, the Nikkei 225 Index and the Topix Index triggered the circuit breaker mechanism and temporarily suspended trading. By the close of trading, the Nikkei 225 Index fell 4,451.28 points, the largest drop in history, with a drop of 12.4%.

Not only Japan, but also major stock indexes in South Korea, Singapore, and Taiwan also fell sharply on the 5th, and the trend of stock markets in Europe and the United States falling from highs was also obvious. Among many markets, the collapse of the Japanese stock market was particularly severe, and many products related to the Japanese stock index passively suffered a significant retracement, which also caused concerns among various funds about global allocation.

Many brokerage people said in an interview with China Securities Journal that the previous high increase and the setback of leading semiconductor stocks were important reasons for the decline of the Japanese stock market, but the more direct trigger may be the strong interest rate hike by the Bank of Japan, which led to the reversal of the carry trade trend of borrowing yen to buy Japanese stocks, and a large number of investors sold stocks. For the future market, UBS and other institutions have also lowered their forecasts for the Japanese stock market to reflect the change in trend.

Strong interest rate hike cuts off carry trade

The sharp correction of the Japanese stock market was not without warning. Yan Xiang, chief economist of Huafu Securities, said in an interview with a reporter from Securities China that from the beginning of this year to mid-July, the Japanese stock market had accumulated a considerable increase. This round of decline followed the adjustment of the US stock market, especially last weekend, when a report pointed out that Buffett had rarely sold nearly half of his shares in Apple, which triggered market concerns about the overseas economic recession.

Ding Rui, head of Japan research at CICC, believes that the fundamentals of Japanese stocks have not changed significantly recently. The main reasons for the sharp drop include market concerns about a global economic recession and the impact of adjustments in the semiconductor market.

He said that the performance of Japanese companies mainly comes from overseas, and if the global economy is in recession, the performance of Japanese companies will be dragged down. At the same time, the weight of semiconductor-related companies in the Nikkei Index totals about 20%. Against the backdrop of the recent sharp drop in US technology stocks, the stock prices of Japanese semiconductor companies have also fallen sharply due to the same logic, which has brought obvious suppression to the Nikkei Index.

Ding Rui also mentioned the impact of Japan's monetary policy on the stock market. "Although Japanese companies conduct global business, most of them are listed on the Tokyo Stock Exchange and issue financial statements denominated in yen. Against the backdrop of yen appreciation, overseas earnings will be included less in yen-denominated financial statements, which will eventually lead to the effect of 'strong yen worsening financial statements'," Ding Rui said.

In fact, the strong monetary policy of the Bank of Japan is considered to be the direct cause of the sharp drop in the Japanese stock market. At the monetary policy meeting that ended last week, the Bank of Japan decided to raise the policy interest rate to 0.25%, and will also reduce the scale of Japanese government bond purchases to implement quantitative tightening (QT). The monthly bond purchase scale will gradually decrease from the current 6 trillion yen to 3 trillion yen in the first quarter of 2026.

Qin Tai, assistant director and chief macro analyst of Huajin Securities Research Institute, said that last week, after two consecutive weeks of foreign exchange market intervention, the Bank of Japan implemented a drastic tightening operation of "raising interest rates + shrinking balance sheet" that exceeded market expectations in order to stabilize the exchange rate against the backdrop of still weak domestic consumer demand. This has caused the market to worry that under the current situation, more major non-US economies will forcibly implement excessive monetary tightening operations at the cost of a greater probability of economic recession in order to stabilize the exchange rate against the backdrop of generally weaker domestic demand than the United States.

Previously, overseas investors borrowed a large amount of yen at low interest rates in the Japanese market and purchased high-interest assets represented by the five major trading companies, forming a stable carry trade. However, the Bank of Japan's move may break this chain. In the context of the yen's continued recovery, the underlying logic of the carry trade may change.

"Customers used to borrow yen at a very low cost and used it to allocate assets in the United States and Japan. Now that the Bank of Japan has raised interest rates, the flow of funds has reversed." Huang Leping, chief analyst of global technology strategy at Huatai Securities, said in an interview with Securities China reporters, "The macro reason for the plunge in the Japanese stock market on Monday was mainly due to the unwinding of yen carry trades."

Institutions lower their market outlook

Many securities dealers are not optimistic about the future trend of the Japanese market.

"In recent years, thanks to monetary easing stimulus and the backing of the Bank of Japan's direct purchase of stock ETFs in the secondary market, the Japanese stock market has continued to rise. The room for further monetary easing in Japan is getting smaller, and the stock market yield performance may be difficult to be as good as in the past few years. In addition, large fluctuations in exchange rates have a great impact on foreign capital." Yan Xiang said.

Qin Tai said that the medium- and long-term trend of Japan's financial market will ultimately depend on the recovery of the supply and demand cycle of Japan's real economy and the degree of support and adaptation of monetary policy stance to the real economy. Due to the very limited space for fiscal expansion, the Bank of Japan has to face the mutually exclusive choices of stabilizing the exchange rate and promoting domestic demand alone. The recent aggressive tightening operation of the Bank of Japan may cause the Japanese economy to quickly return to a sluggish growth range.

On the other hand, in the absence of the logic of domestic consumption demand driving sustainable economic growth, the Bank of Japan's recent intervention in the foreign exchange market may accelerate the consumption of Japan's foreign exchange reserves and may lead to a decline in the effectiveness of exchange rate intervention operations in the medium term, until there is a "Baht moment" similar to the 1997 Southeast Asian financial crisis. By then, Japan's financial markets may see a greater weakening of investor confidence due to the rapid deterioration of real economic and financial conditions.

On August 2, UBS lowered its forecast for the Japanese stock market in a research report to reflect changes in trends, including monetary policy and exchange rates. However, with the rapid adjustment of stock prices in recent days, UBS believes that the appreciation of the yen has been largely digested by the market.

Overseas investment should be wary of high volatility

In recent years, as many overseas stock markets have strengthened, many investors have joined the ranks of overseas asset allocation. In the first half of this year, some on-exchange Nikkei ETFs traded in the A-share market once had a premium of more than 20%.

"We should avoid blindly following the trend of linear extrapolation and thinking that overseas markets will only rise and not fall. Even U.S. stocks, which have performed well in the long term, will experience large fluctuations." Yan Xiang said that for overseas market investments, investors should still make scientific and rational investment decisions based on the relative cost-effectiveness of asset prices in different markets, as well as their own capital attributes and risk preferences.

Qin Tai also pointed out that since 2022, the exchange rate fluctuations of major economies around the world have been significantly amplified. At present, when investing in overseas markets, special attention should be paid to the exchange rate risks of the investment destinations and the two-way fluctuation risks of the RMB relative to the US dollar and a basket of currencies. The factors that determine the exchange rate are divided into two levels: the medium-term and the long-term. The medium-term and the short-term are mainly driven by the differentiation of monetary policies, while the medium-term and the long-term deeply reflect the international competitiveness of economic development strategies and supply and demand cycle structures. At present, the differentiation between the above two factors among countries is relatively obvious, and there are signs of widening differences. Investors must have a clear understanding of this and do a good job of risk assessment and hedging.

Zhang Chi, chief strategy analyst at Guojin Securities Research Institute, said that his overall view on the Japanese stock market is neutral and bearish. He pointed out that the key to the medium- and long-term trend still depends more on the monetary policy orientation of the Bank of Japan, which is related to whether the sustainability of the repair of Japan's economic fundamentals can support the medium- and long-term performance of Japanese stocks. Specifically, the recent hawkish interest rate hike attitude of the Bank of Japan is also an important driving force behind the appreciation of the yen, and the appreciation of the yen is not conducive to the performance of Japanese stocks. If the yen continues to appreciate, it will erode the financial reports of Japanese companies denominated in yen, thereby suppressing their earnings performance. In fact, the seasonally adjusted quarter-on-quarter annualized rate of real GDP in Japan has been negative in two of the past three quarters. If the Bank of Japan continues to tighten its monetary policy, then the view on Japanese stocks tends to be neutral and bearish.

Source: China Securities

Statement: All information content of Databao does not constitute investment advice. The stock market is risky and investment should be cautious.

Editor: Xie Yilan

Proofreading: Ran Yanqing

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