For Japanese investors, the familiar "crazy" rise in Japanese stocks in the first quarter of this year seems to have returned
According to market data, the Nikkei 225 index closed up 3.64% on Friday at 38062.67 points, bringing the weekly rally to an astonishing 8.7%, marking the largest weekly increase since the early stages of the pandemic (April 2020). At the same time, the CSI index closed up nearly 3% during the day, with a weekly increase of about 8%.
As the Japanese stock market stabilizes from last week's historic plunge on Black Monday, all 33 industry sub indices of the Tokyo Stock Exchange Index have recorded weekly gains this week. Since hitting a 9-month low of 31156.12 points on August 5th, the cumulative increase of the Nikkei 225 index has actually exceeded 20%, returning to the technical bull market zone.
Nobuhiko Kuramochi, market strategist at Mizuho Securities, said, "Due to the strengthening of business confidence in the United States and the depreciation of the yen, the Japanese stock market has shown an overall upward trend today. At the current exchange rate level, I believe the reasonable value of the Nikkei 225 index is about 38000 points. If we approach that level, the increase may slow down
T& Hiroshi Namioka, Chief Strategist of D Asset Management Co., also pointed out that "the weak yen and stable US economic data have benefited Japanese exporters. As the market gradually calms down from the plunge, stocks that have suffered significant selling in the past month are being bought back
Previously, the US retail sales data released on Thursday exceeded expectations, leading to a significant increase in risk appetite in the Asian market during the day. The data released by the Census Bureau of the US Department of Commerce on the same day showed that retail growth in July increased by 1% month on month, higher than Wall Street's widely expected 0.4%, reversing the slowdown trend in June and setting a record high in a year and a half.
Foreign investors are making a strong comeback
According to data released by the Japanese Ministry of Finance on Friday, as the stock market fell sharply last Sunday, Japanese decision-makers have sent more signals to stabilize the market, and foreign investors are now beginning to return to the Japanese market to seize the opportunity to buy on dips after the stock price falls.
During the week ending August 10th, foreign investors net bought 521.9 billion yen (3.51 billion US dollars) worth of Japanese stocks, reversing the previous three consecutive weeks of net sales.
The Nikkei 225 index plummeted by 12% on August 5th, marking the largest drop since Black Monday in 1987, but rebounded by 10% the next day. The latest data on capital flows undoubtedly highlights the strong resurgence of overseas investors' pursuit of Japanese stocks, even after the impact of closing yen carry trades on the broader market.
Bruce Kirk, Chief Japan Equity Strategist at Goldman Sachs, stated that as the Japanese stock market regains its footing after experiencing its largest decline since Black Monday in 1987, foreign investors are seeking to buy Japanese stocks.
Kirk pointed out, "We used to be very concerned that the magnitude of the correction in the Japanese stock market would lead to a decline in foreign investors' interest, but it seems that this situation has not yet occurred. If there is any change, I think some foreign investor groups are actually more interested in the Japanese stock market
This Goldman Sachs strategist suggests that investors should take advantage of last week's adjustment to buy stocks, as the recent sell-off has been more technical rather than driven by fundamentals, which is different from the 2008 global financial crisis and the 2011 Fukushima nuclear disaster, when there were social and systemic risks. After the Japanese stock market fell more than 20% from its historical high set in July last week, there have been signs of overseas demand recovery in the past few days.
It is worth mentioning that last week, foreign investors also reversed the trend of selling Japanese bonds for eight consecutive weeks - they net purchased 1.44 trillion yen of long-term Japanese bonds, the largest amount since May 11, and also net purchased 561.8 billion yen of short-term bonds.
Arbitrage trading 'King Returns'
At the same time as the Japanese stock market rebounded significantly, the financing arbitrage trading around the Japanese yen in the foreign exchange market is also announcing the "return of the king" this week.
Since August 5th, the Japanese yen has depreciated by over 5% against the US dollar. The tightening action of the Bank of Japan's "interest rate hike+balance sheet reduction", the anxiety surrounding US corporate financial reports, and the weak non farm payroll report triggered a major storm in yen arbitrage trading in the previous two weeks, pushing the yen to a seven month high at one point. But with the successive end of liquidation actions and appeasement from Japanese decision-makers, the yen is now returning to the track of depreciation once again.
According to ATFX Global Markets data, short positions in the Japanese yen have increased by around 30% -40% in the past week, with a significant portion coming from hedge funds and high net worth clients.
Nomura International has noticed that many investors are now selling their financing currency, the Japanese yen, and investing the proceeds in other assets with higher yields. This indicates that corporate clients and hedge funds, who have always been keen on arbitrage trading, are re engaging in these trades. Antony Foster, head of G-10 currency spot trading at Nomura in London, said that "arbitrage trading has clearly returned" after US retail sales data exceeded expectations.
Foster pointed out that he noticed multiple accounts selling Japanese yen and buying Australian dollars and British pounds.
People's memories are short-lived, and there are too many momentum traders in this field, "said William Vaughan, Deputy Portfolio Manager at Global Investment Management, when talking about arbitrage trading.
Goldman Sachs' Kirk pointed out that the stability of the yen exchange rate should bring comfort to US dollar investors in Japanese stocks, and the current level of the yen may not pose a risk to corporate profits or expectations.
It can be foreseen that if the Bank of Japan remains inactive for a longer period of time, the temptation to re-enter arbitrage trading is bound to increase.
Bank of Japan Governor Kazuo Ueda will deliver a speech at the Japanese Diet on August 23, and traders may be able to obtain more clues from his statement. On that day, Federal Reserve Chairman Powell will also deliver a speech at the Jackson Hole Global Central Bank Annual Meeting, which is also worth investors' attention.