By Summer Zhen
HONG KONG (Reuters) – After last week’s turmoil, international investors are pessimistic about once-popular Japanese stocks as they reassess the economic outlook and the profitability of yen-funded businesses.
Until this month, buying stocks on the Nikkei with cheap yen was a hot trend. The Nikkei index has doubled since the start of 2023, and a falling yen has boosted returns for investors and companies.
This trade is being turned on its head by the sudden volatility of the Japanese yen, interest rate hikes by the Bank of Japan (BOJ), doubts about Japanese public company earnings and concerns about a slowdown in the US economy.
The CSOP Nikkei 225 Daily Double Inverse exchange-traded fund – the only ETF outside Japan that allows bearish bets against the Nikkei index – saw a significant increase in its trading volume in the week ended August 9.
Average daily turnover of the Hong Kong-listed product reached nearly HK$20 million (US$2.57 million), up 20 times from the previous week’s daily turnover of around HK$1 million and the highest since its launch in May this year.
In addition, investors are withdrawing from their direct involvement in Japan.
Global hedge funds sold Japanese stocks at their fastest pace in more than five years during the week of Aug. 2-8, Goldman Sachs said, and even some long-term investors have begun to reduce their holdings.
The BoJ’s quantitative tightening and a strong yen would pose headwinds for Japanese stocks, says Ben Bennett, head of investment strategy for Asia at LGIM, a giant London-based asset manager.
The firm’s multi-asset funds were already underweight Japanese equities before last week, he said, adding that they maintained that weighting even after the volatile week.
Japanese stocks suffered their worst one-day sell-off since 1987 last Monday. Fears of a recession in the U.S. and a surprise interest rate hike in Japan triggered a massive unwinding of a popular multi-billion-dollar yen carry trade that financed purchases of risky assets, including Japanese stocks.
While the actual extent of the unwinding is still uncertain, some analysts warn that there is still room for improvement given the expected appreciation of the yen and a sharp rise in the CBOE volatility index.
The yen rose from around 162 per dollar in mid-July to around 142 per dollar last Monday, reaching its highest level in seven months.
“One of the upward drivers for Japanese equities will fade,” said Carlos Casanova, chief economist for Asia at Swiss asset manager UBP, referring to the yen carry trades.
“Now we need to see an improvement in fundamentals, which means we need to revise earnings forecasts upwards. And that won’t happen if we don’t see a recovery in the domestic economy,” he said.
UBP recently sold some positions in Japanese equities and now takes a neutral stance.
Zuhair Khan, senior portfolio manager at UBP in Tokyo, said trading in the Japanese market was becoming more difficult as both the path of interest rate cuts in the US and the development of the yen were becoming increasingly difficult to predict.
Meanwhile, markets are awaiting data on Japanese economic growth in the second quarter and US inflation due this week.
“Nobody wants to act hastily now,” said Steven Leung, a Hong Kong-based managing director at UOB-Kay Hian. “Investors will have to wait for key figures this week to draw a more informed conclusion about whether the sell-off in Japanese stocks is over.”
(1 US dollar = 7.7882 Hong Kong dollars)
(Reporting by Summer Zhen; Editing by Vidya Ranganathan and Jamie Freed)
