JPMorgan-Japan Equity Strategy Monthly Wrap What’s changed since the...-110144065

Global Markets Strategy03 September 2024J P M O R G A Nwww.jpmorganmarkets.comEquity StrategyRie Nishihara AC(81-3) 6736-8629rie.nishihara@jpmorgan.comJPMorgan Securities Japan Co., Ltd.Yong Guo, CFA(81-3) 6736-8623yong.guo@jpmorgan.comJPMorgan Securities Japan Co., Ltd.Mansi Das(91) 2261 573343mansi.das@jpmchase.comJ.P. Morgan India Private LimitedThe II-Japan research survey is opening soon. If our research adds value, please consider voting for us for 1) Equity Strategy, 2) Thematic Research with 5 stars.Japanese equities experienced their largest drop ever on August 5 (down 25% from their July 11 high). We believe this was because, in response to the BoJ’s hawkish stance/FOMC’s dovish stance at their respective July meetings and weak US employment data, (1) expectations for Japanese and US monetary policies changed, (2) the risk of recession in the US increased, (3) yen carry trade unwound, and (4) increased market volatility led to dumping. Since then, share prices have recovered 70-80% of their declines. We wrote in the early hours of August 7 that Japanese equities had likely bottomed, and we slightly lowered our Japanese equities forecast on the morning of August 9 to reflect the outlook for yen appreciation, while pointing out that there was still upside. We expect market fluctuations in September due to Japan/US monetary policy meetings, the LDP presidential election, and the upcoming US presidential election, but if the yen appreciates to around ¥140/US$ by the end of March 2025, the impact should be manageable (J.P. Morgan house view is ¥144/US$). Following the sell-off, we look for market volatility to remain high for the time being, and our equity investment strategy-related focus points are domestic demand, defensiveness, resilience to yen appreciation, and corporate reforms. Among sectors, we recommend overweighting IT services, heavy industry, domestic consumption relateds, and financials. During our visits to Asian investors (August 19-30), we confirmed a constructive attitude toward Japanese equities, mainly among long-only investors, which we believe is another positive factor.•Stock price performance: TOPIX and the Nikkei 225 fell 2.9% and 1.2%, respectively, in August, underperforming the S&P 500’s and STOXX Europe 600’s rises of 2.3% and 1.3%, respectively (Figure 1 – local currency basis). In US dollar terms, TOPIX was down 0.4% due to yen appreciation, so the underperformance was relatively small on that basis. Japanese equities experienced their biggest decline ever on August 5 (down 25% from their July 11 high), and we believe the main reasons for this were (1) changes in the BoJ/FOMC outlook (responsible for 15% of the drop), (2) unwinding of the yen carry trade (25%), (3) growing fears of recession (25%), and (4) dumping (35%). As of August 30, share prices had recouped 70-80% of their maximum declines at the time of the sell-off, and while all the aforementioned factors settled down, the impact of dumping receded