For Japanese stock investors, the familiar first-quarter stock market frenzy seems to have returned this year...

According to market data, the Nikkei 225 index rose 3.64% to 38,062.67 points at the close on Friday, making a stunning weekly increase of 8.7%, the largest weekly gain since the outbreak of the pandemic in April 2020. Meanwhile, the TOPIX index also rose nearly 3% at the close on Friday, 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 sector indices in the TOPIX stock index recorded weekly gains. Since hitting a nine-month low of 31,156.12 on August 5, the Nikkei 225 index has already risen more than 20%, returning to the technical bull market zone.

Nobuhiko Kuramochi, a market strategist at Mizuho Securities, said: "With stronger US business confidence and a weaker yen, the Japanese stock market is showing an overall upward trend today. At the current exchange rate, I think the Nikkei 225 index has a fair value of about 38,000 points. If we get close to that level, the gain may slow down."

Hiroshi Namioka, chief strategist at T&D Asset Management Co., also pointed out, "Weaker yen and steady US economic data have benefited Japanese exporters. As the market gradually calms down from the sell-off over the past month, stocks that suffered significant declines are being bought back."

Previously, the risk appetite of Asian markets rose significantly on Thursday as US retail sales data exceeded expectations. Data released by the US Census Bureau that day showed that retail sales in July increased by 1% month-on-month, higher than Wall Street's general expectations of 0.4%, reversing the trend of slowdown in June and setting a record high in a year and a half.

Foreign investors return strongly

According to data released by the Japanese Ministry of Finance on Friday, after the sharp fall of the Japanese stock market last week, Japanese decision-makers sent more signals to stabilize the market, and foreign investors are now starting to re-enter the Japanese market to seize buying opportunities after the stock price fell.

In the week ending August 10, foreign investors bought a net 521.9 billion yen ($3.51 billion) of Japanese stocks, reversing the trend of net sales in the previous three weeks.

The Nikkei 225 index plummeted 12% on August 5, marking the largest drop since the Black Monday of 1987, but rebounded 10% the next day. The latest data on fund flows undoubtedly highlights the strong pursuit of foreign investors for Japanese stocks, even after the yen carry trade closure brought shock waves to a wider market.

Bruce Kirk, chief Japan stock strategist at Goldman Sachs Group, says foreign investors are seeking to buy Japanese stocks as the stock market stabilizes after its biggest drop since Black Monday in 1987.

"We were very worried that the depth of the Japanese stock market's correction would cause a loss of interest among foreign investors, but that doesn't seem to be the case right now. If anything, I think certain groups of foreign investors are even more interested in Japanese stocks," Kirk said.

The Goldman strategist said that investors should take advantage of last week's correction to buy stocks, as the recent sell-off is more technical than fundamental, unlike the situations during the 2008 global financial crisis and the 2011 Fukushima nuclear leak crisis, when there were social and systemic risks. There have been signs of a recovery in demand from overseas buyers for Japanese stocks over the past few days after the Japanese stock market dropped more than 20% from its historic high in July.

It is worth mentioning that foreign investors also reversed the trend of net selling of Japanese bonds for eight consecutive weeks last week and bought a net 1.44 trillion yen of long-term Japanese bonds, the largest amount since May 11, and a net 561.8 billion yen of short-term bonds.

At the same time as the sharp rebound in Japanese stocks, the carry trade around the yen in the foreign exchange market also declared the "comeback of the king" this week.

As the Nikkei Index surges, the market sentiment in foreign exchange market is changing for the better with carry trade transactions as well.

Since August 5th, the Japanese yen has depreciated by more than 5% against the US dollar. The Bank of Japan's tightening measures of interest rate hikes and shrinking balance sheets, concerns around US corporate earnings reports, and weak non-farm employment reports caused a massive unwind of yen carry trade two weeks ago, pushing the yen up to a seven-month high. But with the subsequent end of the unwind and Japan's policymakers' soothing words, the yen is now returning to the depreciation track once again.

According to data from ATFX Global Markets, yen short positions increased by around 30% - 40% in the past week, with a large portion coming from hedge funds and high net worth clients.

Nomura International noted that many investors are currently selling financed Japanese yen and investing their funds in other assets with higher yields. This indicates that corporate customers and hedge funds, who have been enthusiastic about carry trade for some time, are re-entering these trades. Antony Foster, Nomura's head of G-10 foreign exchange, says that "carry trade is clearly returning" after US retail sales data exceeds expectations.

Foster pointed out that he noticed several accounts selling yen and buying Australian dollars and British pounds.

"People's memory is short. There are too many momentum traders in this field," said William Vaughan, deputy portfolio manager at Global Investment Management, referring to carry trades.

Goldman Sachs' Kirk also pointed out that the stability of the yen exchange rate should bring comfort to US investors in Japanese stocks, and the current level of the yen may not pose risks to corporate earnings or expectations.

It can be foreseen that if the Bank of Japan does not make any changes in its policy for a longer period of time, the temptation to re-enter carry trades will inevitably increase.

Haruhiko Kuroda, governor of the Bank of Japan, will deliver a speech in the Japanese parliament on August 23, and traders may gain more clues from his statements. On the same day, Chairman of the Federal Reserve, Jerome Powell, will also give a speech at the Jackson Hole Global Central Bank Annual Meeting, which is also worth paying attention to by investors.

Editor/ping