Entering the Japanese market right now is comparable to “catching a falling knife,” according to Kelvin Tay, the regional chief investment officer at UBS Global Wealth Management. He made these remarks during an interview on CNBC’s “Squawk Box Asia,” amid ongoing declines in the Nikkei 225 and Topix indices, which have fallen over 12% and entered bear market territory. The Nikkei experienced a 12.4% drop, marking its largest single-day loss since the infamous “Black Monday” in 1987.
Tay explained that the recent strength of the Japanese market over the past two years was largely due to a significantly weak yen. He warned that as the yen begins to recover, investors need to exit positions quickly, as many are currently doing. The yen, which had fallen to a 38-year low of 161.99 against the U.S. dollar in June, gained strength leading up to the Bank of Japan’s policy meeting. Following the BOJ’s decision to raise its benchmark interest rate to approximately 0.25% last week and reduce its purchases of Japanese government bonds, the yen was last trading at 144.82 against the dollar, its lowest level since January. A stronger yen typically pressures the Japanese stock market, which relies heavily on trading companies and export-driven businesses that may lose competitiveness.
Bank of Japan Governor Kazuo Ueda adopted a hawkish stance during his post-meeting press conference on July 31, indicating that the central bank would continue to raise interest rates if economic conditions align with their projections. He mentioned that there is “still quite some distance” before the policy rate would be at a neutral level, which neither slows down nor overheats the economy. Ueda further noted that the 0.5% interest rate level, not seen since 2008, is not a ceiling and that rates could potentially increase further.