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A week ago, the Bank of Japan's unexpected interest rate hike and Governor Kazuo Ueda's "hawkish" remarks caused a storm in the global market, leading to a "Black Monday" in global stock markets this week. Among them, the Nikkei 225 index recorded the largest single-day point drop since 1987.

Michael Tsuruda, a 27-year-old insurance company employee living in Tokyo,Big dropSuffering heavy losses, he mainly invested in some high dividend stocks in Japan. On August 5,Japan Tobacco, which is favored by retail investors due to its high dividends,Big drop16.8%, SoftBank GroupPlunge18.7%。Tsuruda said he knew the stock market would fall after the Bank of Japan raised interest rates, but he did not expect the drop to be so sharp.

Amid historic volatility in Japan's financial markets,On Wednesday, August 7, Shinichi Uchida, deputy governor of the Bank of Japan, made a public statement.Promises not to raise interest rates when the market is unstable,This is in stark contrast to Kazuo Ueda's "hawkish" remarks a week ago. As soon as these remarks were made, the Japanese stock market rebounded sharply and the yen fell. As of the close of the day, the Nikkei 225 index closed up 1.19% and the Topix index rose more than 2%. The day before, the Nikkei 225 index rebounded more than 10%, setting a record high in terms of points gained.

Nikkei 225 Index Trend in the Last Five Days Image Source: Google Finance

Does the two-day rebound in Japanese stocks mean that the unwinding of yen carry trades has ended?Dr. Zhang Ling, chief economist of Huatong Securities International, analyzed in an interview with a reporter from the "Daily Economic News" that the market's big "crash" was mainly caused by the liquidation of yen carry trades.

In this regard,There is a clear divergence of views among major Wall Street investment banks: Investment banks led by JPMorgan Chase believe that the closing process of yen carry trades is only halfway completed, while Goldman Sachs and Societe Generale believe that the closing of yen carry trades is nearing the "end."

After the "darkest moment", the deputy governor of the Bank of Japan released a "dovish" stance: interest rates will not be raised when the market is unstable

On July 31, Tokyo time, the Bank of Japan raised its policy rate to 0.25%.The comments, along with the prospect of an imminent rate cut by the Federal Reserve, pushed the yen sharply higher.

With the appreciation of the Japanese yen,The yen carry trade began to reverse.The Japanese stock market fell sharply. On August 5, the Nikkei 225 Index recorded its largest single-day drop since 1987. Under the chain reaction, global stock markets, including the United States, also fell sharply on the same day.

On August 5, the Nikkei 225 index recorded its largest single-day drop since 1987. Image source: Reuters

Speaking to business leaders in northern Japan early on August 7 after violent stock market turmoil, Uchida said Japan is not like the United States and Europe a few years ago, when soaring inflation in Europe and the United States led their central banks to quickly raise interest rates.The Bank of Japan will not raise its policy interest rate amid instability in financial and capital markets.”

Uchida called recent market developments "extremely volatile." "The Bank of Japan is closely monitoring developments in these markets and their impact on economic activity and prices," he said, adding that changes in stock prices and exchange rates need to be watched because they could affect corporate investment and inflation. He also highlighted the accommodative side of the Bank of Japan's current policy, saying the 0.25% policy rate is particularly low in real terms after taking inflation into account.Therefore, the Bank of Japan will continue to support the economy by maintaining highly accommodative financial conditions.”

As the first official to speak publicly since the Bank of Japan's unexpected rate hike last week, Uchida's remarks are in stark contrast to what Ueda Kazuo said at a press conference last Wednesday after the rate decision was announced. Ueda Kazuo also stressed last week that interest rates are still at a very low level after the rate hike, and the financial environment is still loose, which will not cause major resistance to the economy.If the economic and price outlook meets or even exceeds expectations, further rate hikes may be in the cards.

Market watchers said Uchida's dovish comments showed the Bank of Japan's uneasiness about recent market volatility, suggesting less potential for future gains in the yen.

Daily Economic NewsThe reporter noticed that on Monday, the day when global stock markets plummeted, some people even believed that the Bank of Japan might have to cut interest rates again to quell the impact of stock market fluctuations and the sharp appreciation of the yen in the short term on the Japanese economy.

Dr. Zhang Ling, chief economist of Huatong Securities International, did not agree with this view when he was interviewed by a reporter from the "Daily Economic News".

"For the central bank, 'saving the market' is not the primary policy goal. The goal of any central bank in policy regulation should be to seek a match between money supply and economic structure on the basis of ensuring the continuity of monetary policy. Therefore, whether it is the expectation of future interest rate hikes or the intervention in exchange rates, they actually reflect two characteristics of the central bank's policies. One is that the central bank will strive to maintain market confidence; the other is the predictability of policies and the stabilization of fluctuations.After the expectation of rate hike was released, the sudden reverse rate cut did not save the market., but will seriously affect the credibility of the central bank and lead to the abuse of policy tools. "Dr. Zhang Ling pointed out to reporters.

Flee or buy at the bottom? Japanese retail investors say

Although Japan's stock market suffered its biggest one-day drop since 1987 on Monday, some retail investors still chose to "buy the dip", betting that the country's economic downturn is only temporary.

“I have mixed feelings about this historic drop,” said Ken Wang, a 30-year-old project manager who lives in Kobe. “I am both fascinated by the speed of the sharp drop and curious about what will happen next. I choose to hold on to my position and continue to add to existing stocks in my portfolio.”

Michael Tsuruda, a 27-year-old insurance company clerk living in Tokyo, has a similar view. He has about half of his assets in Japanese stocks, mainly high-dividend stocks. Tsuruda suffered heavy losses in Monday's plunge, with Japan Tobacco, a favorite among retail investors like Tsuruda for its high dividends, falling 16.8% and SoftBank Group Corp. falling 18.7%.TsurudaHe said he knew the stock market would fall after the Bank of Japan raised interest rates, but he did not expect it to fall so sharply.

But Tsuruda believes that Japanese stocks will resume their upward trend and he still plans to stay in the market as a long-term investor and hopes to buy dips after the market stabilizes.

Foreign media reported that while some retail investors have shown resilience, the widening losses may curb the risk appetite of other Japanese retail investors at a time when the Japanese government is trying to encourage people to shift some of their savings to investment. According to data from the Japan Securities Dealers Association, Japanese households invested at least 7.5 trillion yen (about 52 billion U.S. dollars) in new tax-free investment accounts called NISA in the first half of this year, almost four times the same period last year.

Japan's Minister of FinanceSuzuki ShunichiAfter the stock market plunge on Monday, he said he hoped investors would make calm decisions based on the importance of long-term accumulation and diversification, even during market fluctuations such as market declines.

Is the unwinding of the yen carry trade over? JPMorgan Chase, Goldman Sachs and other investment banks have obvious differences

After "Black Monday", Japanese stocks have risen for two consecutive days, and the VIX index also fell sharply on August 6. The market began to discuss whether the "unwinding of yen carry trades" has ended.

Based on the latest views of several Wall Street investment banks, there are still significant differences on this point.JPMorgan Chase believes that the unwinding of the yen carry trade is only halfway through, and Nomura also believes that this wave of carry trade unwinding has not yet ended. Goldman Sachs and Societe Generale believe that the unwinding of the yen carry trade is nearing its "end."

On August 6, JPMorgan Chase warned that the yen is still one of the most undervalued currencies and there is still room for the recent carry trade to be closed. Arindam Sandilya, co-head of global foreign exchange strategy at JPMorgan Chase, said in an interview with the media, "It is not over yet. The carry trade has only been closed by 50% to 60%, at least in the field of speculative investment."

JPMorgan Chase believes that the carry trade of the yen is unlikely to return to past levels and the appreciation trend of the yen has not ended. Sandilya pointed out that "due to the technical damage caused to the portfolio by the short-term sharp fluctuations, the carry trade is unlikely to quickly return to the level before the yen rebound. The best case scenario for the market is to stabilize around the current level, with a slight rebound at most. However, in many similar cases, the trend tends to continue, but the speed will slow down."

Shaun Osborne of Scotiabank echoed this sentiment. He pointed out,Two gauges of the carry trade - the Bloomberg G10 Carry Index and the GSAM FX Carry Index - fell around 5%, just half the declines seen in the past three carry trade unwinds.

On the other hand, investment banks led by Goldman Sachs are optimistic and believe thatPressure to close short yen positions has now been largely eliminated, which means the pain of the carry trade is about to end. Goldman Sachs' foreign exchange team's position score shows that the yen short position has been basically liquidated, which indicates that the market is about to bottom out.

Societe Generale also believes that the unwinding of the yen carry trade is nearing its "end." Manish Kabra, a strategist at the bank, pointed out that weak U.S. inflation data and the Bank of Japan's hawkish stance have driven a reversal of the dollar-yen carry trade, which is exacerbating risk aversion in the Nasdaq 100 Index. Although the yen is still far from fair value, the U.S. Commodity Futures Trading Commission (CFTC) in JulyCFTC) Positioning data showed that most of the short yen positions have been closed.

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Daily Economic News