Last week, almost all global stock markets experienced a frantic scene of "Black Monday", and Japan, as the "culprit", triggered an "epic tsunami" in its market: with widespread liquidation of yen carry trades, all assets including Japanese bonds, yen and stocks were not spared and suffered severe losses.

Last Monday, the yen against the dollar soared to a high of US$1 for 141.70 yen, and the Nikkei 225 index plummeted by more than 12%. However, as of today's close, the index rose 3.45% to 36,232.51, completely recovering from last Monday's 12.4% decline. The TOPIX index rose 2.8% to 2,553.55.

The main driver of the surge in Japanese stocks is the change in the foreign exchange market, as the weakness of the yen has provided support to export-oriented companies such as auto manufacturers and technology firms. As of press time, the US dollar against the yen has risen by as much as 0.43%, now at 147.839, and earlier last week it had fallen below 142 US dollars.

After Nvidia rebounded and pushed up the Philadelphia Semiconductor Index, Japanese technology stocks, including Tokyo Electron, rose across the board. Among the Nikkei 225 Index, Rakuten is one of the stocks with the largest increase, and the conglomerate's operating loss is narrowing due to steady development of its mobile business.

Ikuo Mitsui, a fund manager at Aizawa Securities, said:" The massive sell-off peaked last week, and investors are now turning their attention to the fundamentals of corporate profitability and buying stocks at low valuations."

Will there be another rate hike?

Since unexpected rate hikes at the end of July caused that "tsunami", the market turmoil and the Japanese central bank's response have kept market participants cautious. Pricing in the money market indicates that the possibility of the Bank of Japan's interest rate hike this year has significantly declined. The BOJ Deputy Governor Shinichi Uchida also promised not to raise interest rates during market instability.

Seamus Mac Gorain, global head of interest rates at JPMorgan, said Uchida's remarks mean that the next rate hike by the BOJ may have to wait until next year.

"They (the Bank of Japan) may carry out a series of rate hikes, but this will depend on a fairly mild global background. Clearly, the Bank of Japan will not take action until the market stabilizes. And whether or not the market stabilizes, of course, depends on whether the US and global economies can avoid a recession." he said.

Former BOJ board member Makoto Sakurai said on Monday that given the market turmoil triggered by the recent rate hike (i.e. "Black Monday") and the low probability of Japan's rapid economic recovery, the central bank will not be able to raise policy rates again this year.

"At least for the rest of this year, they won't raise interest rates again. It's hard to say whether they can raise interest rates before March next year," he said.

Can the upward trend hold?

Goldman Sachs said in its latest research report that it still has a positive long-term outlook for Japanese stocks, and expects the TOPIX index to rise to 2,900 points in 12 months. The bank believes that although the full recovery of investor sentiment will take time, Japanese stocks are still supported by multiple bullish factors.

First, as the clearing of yen carry trades gradually subsides, its impact on the trend of the yen and Japanese stocks is expected to weaken.

According to the CTFC's data as of August 6th, non-commercial investors' net short positions have fallen from a high of $15 billion in the previous period to $1 billion. The report pointed out that this means that about 90% of yen arbitrage trades may have been closed.

Second, the dominant position of Japanese stocks may return to domestic investors.

Finally, the number of share buyback announcements by Japanese companies this year has already exceeded the total for last year, and most were released in the first half of this year, so there is reason to speculate that these companies are still in the initial phase of stock buyback plans and have a large amount of liquid funds.

In addition, Japanese business reform is gradually releasing dividends, and Goldman Sachs expects that the momentum for Japanese companies to buy back shares will continue to be strong, which will also provide momentum for Japanese stocks to rise.

Editor/ping