Japan’s stock markets hit a six-month low, experiencing declines for two consecutive days following the Bank of Japan’s decision to raise benchmark interest rates to their highest level since 2008. The Nikkei 225 and Topix indexes plummeted over 5%, marking their worst sessions since March 2020, according to FactSet data. This downturn comes less than a month after the Nikkei reached an all-time high of 42,224.02 on July 11.
Speaking on CNBC’s “Squawk Box Asia,” Bruce Kirk, chief Japan equity strategist at Goldman Sachs, described the market rally as being in a “transitional phase.” He explained that the recent rally was driven by yen weakness, expectations of monetary policy normalization, and corporate governance reform. Despite the current decline, Kirk emphasized that the rally is not broken but evolving, accompanied by heightened volatility and aggressive sector rotation.
Japan’s markets had been Asia’s top performers until June this year. However, the dynamics have shifted, especially concerning interest rates and foreign exchange. Kirk highlighted a newfound investor interest in small- and mid-cap companies due to their domestic focus and reduced exposure to exchange rate fluctuations.
Kirk pointed to two main reasons for the market reassessment post the Bank of Japan’s rate hike. Investors doubt the Japanese economy can handle significant rate increases and are concerned about corporate profitability with the yen trading below 150 against the dollar. The yen is currently at 149.4 against the greenback.
Additionally, a crowded market scenario where investments are concentrated in a narrow group has exacerbated the sell-off when fundamentals shift. Kirk likened the current situation to seven previous “momentum pullbacks” over the past two years, usually seeing a 7% to 8% drop and taking about two months to recover.
This situation resembles the market reaction in December 2022, when the BOJ adjusted its yield curve control policy, which it eventually abandoned in March.
Original Story https://www.cnbc.com/2024/08/02/japan-stock-sell-off-shows-its-market-is-undergoing-a-fundamental-shift-.html
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