On August 5th, Caixin reported that the Japanese central bank's rate hike last week dealt a devastating blow to the country's stock market. Despite the market's huge shock, some investors remain confident in the long-term prospects of the Japanese stock market.

Analysts and strategists, including Hang Seng Investment Management, Goldman Sachs, and T. Rowe Price, have stated that as Japan normalizes after years in negative interest rates, the pricing power of businesses and wage increases for workers will stimulate economic growth and support the market.

Japanese stocks hit circuit breakers and plummeted.

Last Wednesday (July 31st), the Bank of Japan decided to raise interest rates to 0.25%. Although the TOCOM futures rose 1.5% on the day of the interest rate hike, it began its steep decline from last Thursday (August 1st).

Among this round of volatility in Japanese equities, financial stocks have suffered the most. After the rate hike on Wednesday, bank stocks initially surged, with the Topix Banks rising 4.7%. However, this index plummeted 11% on the following Friday (August 2) and 17.8% on Monday (August 5).

Among them, Japan's largest bank, Mitsubishi UFJ Financial Group, plummeted 12% on Friday, despite the company announcing earnings that exceeded analysts' expectations on the previous day. Similarly, Mizuho Financial also fell 11% last Friday despite exceeding profit expectations. Daiwa Securities also plummeted 19% last Friday due to failing to meet analysts' expectations.

In addition, Japanese exporters have also become a 'hard-hit area.' The Bank of Japan's interest rate hike, combined with the Fed's signal of a rate cut, has pushed up the yen's exchange rates. The weak yen has been a major factor in supporting Japanese exporters' stock prices.

Among them, Toyota Motor's stock price fell nearly 14% on Monday after falling 8% the previous Thursday.

On Monday (August 5), the Nikkei 225 index and TOCOM futures triggered circuit breakers twice, and their closing prices were more than 20% below their July highs, meaning that they entered a technical bear market.

Optimism about the long-term prospects.

Further rate hikes by the Bank of Japan may narrow the interest rate differential between the United States and Japan, which makes some investors less optimistic about the market's prospects.

Sandeep Jadwani, Director of Habib Investment Consulting in the UAE, said, 'Given the volatility of US technology stocks and the closing of forex arbitrage trades, we believe investors should prioritize these immediate risks. The Japanese stock market may face sustained downward pressure.'

Nevertheless, many analysts remain optimistic about the medium to long-term prospects of Japanese stocks. Wilfred Sit, Director and Chief Investment Officer of Hang Seng Investment Management, said, 'The long-term fundamentals of Japanese equities remain stable, and looking ahead, Japan's economy may show more signs of gradual recovery next year.'

Rina Oshimo, Senior Strategist at Okasan Securities, believes that 'many companies' assumptions about the yen are still stronger than current levels, so corporate performance is unlikely to deteriorate significantly. For companies with strong profit potential, falling stock prices may actually be an opportunity to buy in the medium to long term.'

Daniel Hurley, emerging markets and Japanese equity portfolio expert at T. Rowe Price, said,'The rate hike will support financial stocks -- mainly banks and insurance companies -- while small regional banks will benefit the most as larger banks have more overseas exposure and will be more affected by a stronger yen in overseas returns.'

Some analysts pointed out that as banks begin to receive interest on deposits at the central bank and raise mortgage interest rates for homeowners, bank earnings are expected to improve.

Kazunori Tatebe, strategist at Goldman Sachs, said, 'We still believe that domestic economic improvement is the key catalyst for Japan's stock market gains, and we remain optimistic about the medium term. At the same time, the Japanese stock market cannot be isolated from global developments, so we may also need to see investors' concerns about the US economic recession ease and see a moderate strengthening of the yen -- so we are cautious in the short term.'

Frank Benzimra, the Asia stock strategy head at Industrial Bank of France, wrote in a report, "The moment of selling off Japanese stocks coincided with the reversal of carry trades. This seems to indicate that it is capital flows that are driving the market sell-off, rather than fundamentals."

BI analyst Hideyasu Ban also pointed out, "My impression is that the overall decline in market sentiment is dragging down financial stocks, rather than concerns about possible deteriorating fundamentals."