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Previously, a series of weak US data triggered recession trading, and the liquidation of yen carry trades caused by the "hawkish" stance of the Bank of Japan in its July interest rate decision caused US stocks and Asia-Pacific stock markets to experience "Black Friday" and "Black Monday" respectively.

This Friday, Bank of Japan Governor Kazuo Ueda will attend a hearing in the Japanese parliament to explain why the interest rate hike was in July. Although the market has lowered its expectations for the Bank of Japan's interest rate hike after the recent market turmoil, some asset management giants are still betting that the Bank of Japan will raise interest rates again this year. Japanese assets are still favored by investors. After "Black Monday", many active investors took the opportunity to buy Japanese stocks at the bottom, and the purchase scale reached the largest in nearly two months. As yen carry trades continued to close, hedge funds also became net bullish on the yen for the first time in the past three years.

Many asset management giants bet against the market trend that the Bank of Japan will continue to raise interest rates

Overnight swap market bets on the Bank of Japan raising rates again before the end of the year have fallen to about 34% from more than 60% at the beginning of the month. Earlier, in an effort to reassure markets, Bank of Japan Deputy Governor Shinichi Uchida hinted that policymakers would avoid raising rates when markets were unstable, which was seen by many investors as a signal that the Bank of Japan was turning "dovish" again. Subsequently, the leadership battle of Japan's ruling party further cast a shadow on the prospects of a rate hike in the near term.

However, some well-known global asset management institutions still stick to their previous judgment. Li Zhennan, senior economist for Asia at Swiss Bank UBS Wealth Management, told the First Financial reporter that the main reasons why the Bank of Japan chose to raise interest rates again at the July meeting include that the development of Japan's economic growth and inflation is roughly in line with its expectations; the measures to increase wages have gradually expanded, so the Japanese authorities are more confident about the virtuous cycle between wages and inflation; with the weakness of the yen in the previous few months, the accelerated increase in import prices has created an upward risk to prices. Regarding the future path, he said that although there are many uncertainties in Japan's neutral interest rate level, it is still expected that the Bank of Japan will gradually raise interest rates further so that the policy rate will be close to the nominal neutral interest rate, as the bank recommended in its April meeting.

Vanguard, the world's second-largest asset management company, is still betting that the Bank of Japan may raise interest rates by another 50 basis points before December, and based on this judgment, it will hold the Japanese governmentBondsShort positions doubled. Ales Koutny, head of international rates at Vanguard, believes the Bank of Japan will need to raise rates faster than expected. "Some people think Uchida's comments mean the Bank of Japan won't raise rates again, but I think it's just reassurance to the market. After Japan ended its decades-long struggle against flat and falling prices, rising wages can continue to boost the domestic economy and open the door to up to two more rate hikes this year," he said.

Asset management firm M&G Investment Management also bets that the Bank of Japan will continue to raise interest rates this year, and continues to increase its short positions in Japanese government bonds and at the same time increase its holdings of the yen. Further rate hikes will stimulate further appreciation of the yen, while Japanese government bond yields will continue to rise gradually. M&G fund manager Eva Sun Wai said: "We think the Bank of Japan's attitude may be more hawkish than the market hopes. I would not be surprised if the Bank of Japan raises interest rates slightly again before the end of the year."

RBC BlueBay Asset Management is also looking to increase its selling of 10-year Japanese sovereign bonds. Mark Dowding, the agency's chief investment officer and a long-term bearish JGB, said, "Japan's trades have cost us in the past few weeks, but we have not been forced to close our positions. The data and news still support our views, and we want to be patient with this position." In addition to betting on rising yields on shorter-term JGBs, the institutions have also begun to trade yield curve flattening, buying JGBs with maturities of 30 years or longer.

Japanese stocks are under-fished on a large scale

Documents submitted to Japan's Ministry of Finance show that during the biggest drop in Japanese stocks since October 1987 on August 5, funds under Yoshiaki Murakami, Tokyo Strategic Capital Inc. and Nippon Active Value Fund Plc, a well-known Japanese active investor, bought a total of 2.8 million Japanese shares, the largest amount in at least the previous 60 days. The companies purchased included Sumitomo Mitsui Construction Co., Ltd. and auto retailer Yellow Hat Co., Ltd. Other active investment funds that increased their holdings of Japanese stocks on August 5 included Singapore-based Effissimo Capital Management and 3D Investment Partners, as well as U.S.-based Dalton Investments, according to the documents. When shareholders who hold more than 5% of a company's shares change their holdings by more than 1%, they need to submit documents, which can only be traced back to 60 days ago.

These active investors have been increasing pressure on Japanese companies to continue to improve shareholder returns, a goal they share with Japanese policymakers, whose improvements to Japanese corporate governance have sparked interest in Japanese stocks from global investors, including Warren Buffett.

Masatoshi Kikuchi, chief pan-Asian equity strategist at Mizuho Securities Co. in Tokyo, said active investment funds are contrarian value investors and "may think this plunge is the best buying opportunity." He added that traders also tend to follow funds with good performance records, including Murakami and 3D Investment Partners, so it is expected that Japanese stocks will have greater upside potential after these investors buy the bottom of Japanese stocks.

Goldman SachsBruce Kirk, chief Japanese equity strategist at , also said that after the Japanese stock market experienced its biggest drop since 1987, as the market gradually stabilized, foreign investors began to consider buying Japanese stocks again. "We were very worried that the scale of the correction might temporarily make foreign investors lose interest, but it seems that this has not happened at this stage. The interest level of some foreign investors has increased significantly." He also suggested that investors should take advantage of the previous correction to buy, because the recent sharp drop in Japanese stocks is more technical than fundamental, unlike the global financial crisis in 2008 and the Fukushima nuclear power plant accident in 2011, when there were social and systemic risks.

At the close of today's morning session, the Nikkei 225 index rose 1.7% to 38015.87 points, and the Topix index rose 1% to 2668.52 points, leading the gains in Asia-Pacific stock markets. The "US recession trade" that had previously caused market turmoil has been replaced by the "US soft landing trade" in the past week, and the market's expectations for the Federal Reserve to increase interest rate cuts have also been re-strengthened.

In addition, the start of the battle for Japan's prime ministerial successor is also considered to be beneficial to Japanese stocks.UBSThe Wealth Management Chief Investment Office (CIO) released a report this week saying that Japanese Prime Minister Fumio Kishida announced that he would not participate in the Liberal Democratic Party presidential election in September, which means that after winning the presidency, the next LDP leader will be directly appointed as prime minister without a public vote. The House of Representatives election will be held in October 2025 at the latest, but Kishida's departure increases the possibility of early general elections before the end of the year, because no matter who becomes the next LDP leader, the support rate is likely to be higher than the level currently achieved by Kishida Fumio, and a wider vote during this "honeymoon period" may strengthen the ruling coalition's majority advantage.

Japanese stocks tend to perform strongly during House of Representatives elections. Since 2000, Japanese stocks have risen an average of 6% in the 50 days before and after House of Representatives elections. In terms of industries, UBS continues to prefer banks, electronic components, high dividend yield stocks and domestic demand stocks whose earnings drivers are less affected by exchange rate changes, and believes that the risk-return of the semiconductor industry has also improved after the recent decline.

Hedge funds are net bullish on yen for first time in three years

Not only Japanese stocks, but also the yen, which has been weak for more than a year, has been net bullish by hedge funds for the first time since 2021.Commodity FuturesAccording to data from the CFTC, hedge funds held a net 86 long yen contracts worth about $7 million in the week ended August 13. Although this is a small amount, it is the first time in nearly three years that hedge funds have been net long on the yen. In the week ended August 6, hedge funds also held a net short yen of nearly 20,000 contracts.

This is related to the recent large-scale liquidation of yen carry trades. One of the main drivers of yen weakness was the yen carry trade. In Japan's low interest rate environment, a large number of traders borrowed cheap funds in Japan to buy overseas assets with higher yields. In early July, the US dollar hit a 38-year high of 162, and the yen was extremely bearish. But as CFTC data shows, since the beginning of July, hedge funds have been cutting their short positions in the yen, causing the yen to appreciate by about 10% against the US dollar during the period, outperforming other currencies of G10 countries. Under such a rising trend, a large number of yen carry traders began to close their positions.

Aozora BankAozora Bank"The unwinding of carry trades is likely to continue to support the yen, so it is difficult to assume that short yen positions will continue to increase as they have in the past," Akira Moroga, chief market strategist at ETF.com, said before the CFTC report was released. "The panic positioning is expected to end, but investors will continue to try to buy the yen."

The Chief Investment Office (CIO) of UBS Wealth Management believes that given voters' dissatisfaction with the yen's weakness and inflation, these two issues will become the focus in the LDP presidential nomination campaign. Among the at least five possible candidates, each has a different position on fiscal spending, central bank independence and exchange rate policy. These policy differences may cause yen fluctuations before a widely recognized candidate emerges. But overall, UBS still predicts that the exchange rate of USD/JPY will be 147, 147, 143 and 140 by September 2024, December 2024, March 2025 and June 2025, respectively. More broadly, the Fed's rate cuts before the end of 2024 should lead to a weakening of the US dollar against multiple currencies in 2025, so even if there is a subsequent rebound, investors can still consider shorting USD/JPY when it exceeds 150.