Anika Begay
Vscek — A bearish rally in Japan’s stock market was possible as foreign investors remained on the sidelines, JPMorgan analysts wrote in a note, although that trend also raised doubts about the sustainability of an ongoing market rebound.
Last week, both Japanese stocks and stock indexes plunged into a bear market, falling more than 20% from recent all-time highs.
While both indexes rebounded sharply from losses, JPM argued that the rebound was driven primarily by “contrary domestic individual investors and domestic institutional investors.”
The brokerage firm also attributed much of the recovery to short-term buying and said it had not seen a strong trend of foreign investors returning to Japanese markets.
That made it “premature to conclude that we have entered a sustained relief rally,” JPM analysts wrote.
“We cannot rule out the possibility that the current rebound is nothing more than a bear market rally. The extent to which domestic investors can push the market back up until foreign investors earn a full return is crucial, testing their ‘ability to hold’.”
Foreign investors aggressively sold Japanese stocks last week, and JPM said there was no indication they had returned to Japanese markets during the recent rally.
The few foreign purchases that did occur were more oriented towards defensive purchases or towards banks, which should benefit from higher interest rates.
Sentiment toward Japanese markets was decimated by hawkish signals from the Bank of Japan at a late July meeting, where the central bank raised interest rates and signaled further increases this year.
The stronger-than-expected data released on Thursday, while painting a positive outlook for the Japanese economy, also gives the BOJ more leeway to raise interest rates further.
