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Cailianshe News, August 12 (Editor: Xiaoxiang)Japan's stock market kicked off August with a record three-day drop that wiped out $1.1 trillion in market value, but for some bullish investors, it gave them a new reason to buy one of the hottest trading assets in 2024.

Many industry insiders have talked about the advantages that Japanese stocks currently have after the sharp drop in the past few days:

The stocks that have been hit hardest are the ones that have soared the wildest and whose prices have fallen back to more attractive levels;

The valuation improvement movement that has increased the international appeal of Japanese stocks is still continuing, and this round of sharp declines has actually removed some bubbles from this market with an overall market value of US$6.1 trillion;

While the Bank of Japan caught some traders off guard with its rate hikes and balance sheet reduction last month, the central bank capitulated last week by saying it would not tighten monetary policy too quickly to further destabilize markets. That helped to curb the yen’s sudden rise while also removing a key threat to the stock market rally.

In terms of the global external environment, the latest US labor market data (initial claims last Thursday) helped ease concerns about the risk of a potential recession in the US;

At the same time, major technology companies around the world are still stepping up plans to invest billions of dollars to build AI infrastructure.

In this regard, Tetsuro Ii, CEO of Commons Asset Management, said,This doesn’t look like a major economic or financial crisis. Investors have now recognized that monetary policy in Japan and the United States is “entering a new phase” and have taken this as a cue to exit previously crowded positions.

Bottom-hunting funds are ready to move

Data from the derivatives market showed that many market traders remained positive on Japanese stocks.Open interest in Nikkei 225 call options has risen faster than that in put options. The put/call ratio has retreated to its lowest level in about 6-1/2 years, suggesting bets on a market rebound are becoming popular.

Judging from the trend in recent weeks, the Topix index has fallen 12% since the end of June. Those stocks that performed well at the beginning of the year have been more affected in this round of decline: MSCI's Japanese semiconductor-related stock index has fallen 25% during this period, and the surge in chip stocks driven by AI has been the main driver of this year's gains. Bank stocks also rose sharply in the early stage due to expectations of rising interest rates, but they also fell 16% in this round of decline.

"I don't think this is a bubble, but the market was certainly carried away," said Toru Yamamoto, chief strategist at Daiwa Asset Management. He noted that when risk exposure needs to be cut, those positions that were most inflated will be cut.

Earlier this year, Japanese stocks became one of the most sought-after markets for global investors on expectations that inflation would return after more than two decades of price stagnation and that Japanese companies would return more cash to shareholders under governance reforms pushed by the Tokyo Stock Exchange.

andGiven that the recent decline has made stock prices cheaper, some industry insiders believe that this may become more attractive to overseas investors, such as Warren Buffett, who has increased his holdings in Japan's five largest trading companies several times in recent years.

A comparison of a set of valuation indicators shows that the current forward price-to-earnings ratio of the Topix Index is about 13 times, while the S&P 500 Index is about 20 times. The forward price-to-earnings ratio of the Japanese Semiconductor Index has also dropped from 35 times at the beginning of this year to 21 times.

"People felt the market had gone a bit too far last month, and with the sell-off, the market is back to where it should be," said Masayuki Murata, general manager of balanced portfolio investments at Sumitomo Life Insurance Co. "At current valuations, we can say we are relatively cheap."

Of course, the risks in the Japanese market are still clearly there, especially if the Bank of Japan tightens further in the future and the Federal Reserve turns to cutting interest rates, causing the yen to continue to strengthen.In the past few years, the yen's fall to multi-decade lows has helped drive Japanese stocks higher as a weaker yen is seen as boosting overseas profits for Japanese exporters.

The Nikkei Volatility Index, Japan's version of the "fear index," closed at 45 on Friday. While that's down from Monday's intraday spike of 85, it's still well above its long-term average of around 22.

For Ben Bennett, head of Asian investment strategy at Legal & General Investment Management, crowded positioning is why he thinks people are shying away from Japanese stocks during this sell-off. “The question is whether that crowded positioning has been substantially reduced.I think it will take more than a few days of volatility to get positioning back to neutral. But if it does, I think investors who are bullish on Japanese equities may even add to their positions on recent market weakness.”

Arihiro Nagata, managing director of Sumitomo Mitsui Banking Corporation, said the recent turmoil was not surprising given the various pressures facing the market at high levels. He pointed out, "I think any trigger will lead to a correction. It's hard to predict, but I think the current positions have become light and the market has become cheap enough."