After "Black Monday" | Will the hottest sector in the Japanese stock market also rebound the strongest after a sharp decline?

A 26.5% plunge in three trading days, where do Japanese bank stocks go from here?

Japanese bank stocks have risen by 9% overall this year, but encountered massive sell-offs last week, causing a sharp drop in stock prices. Despite this setback, some analysts believe that bank stocks in the Japanese stock market are relatively resilient and are expected to rebound.

Plunge in Japanese Bank Stocks, Impact of Declining U.S. Bond Yields Overrides Bank of Japan Rate Hike Impact

In the first three trading days of August, the TOPIX Banks Index fell by 26.5%, far exceeding the TOPIX Index's 20.3% decline. Both indices experienced the largest three-day declines in at least forty years.

The poor performance of Japanese banks is somewhat unusual: the key trigger for this sell-off was market concerns that the Bank of Japan might continue to raise interest rates after the hike on July 31st, even though higher rates are actually beneficial for bank profits.

Investors had expected higher rates to boost bank stocks, but worries about a possible U.S. recession overshadowed the impact of the Bank of Japan's rate hike, leading to a decline in Japanese government bond yields, ultimately dragging down Japanese bank stocks.

Yoshitaka Suda, cross-asset strategist at Nomura Securities, pointed out that shorting Japanese government bonds and buying Japanese bank stocks was one of the most crowded trades in hedge funds, and the sharp drop in Japanese bank stocks led to massive unwinding of these trades. As investors rushed to unwind their positions, they sold off bank stocks in large quantities as a quick way to exit trades, causing the bank stocks to plummet.

Prospects for Bank Stock Recovery

Despite the rare sharp decline in Japanese bank stocks in decades, the outlook remains optimistic.

Yoshitaka Suda believes that high dividend yields favor bank stocks, stating:

"I don't think bank stocks will continue to be sold off. Hedge funds have lightened their positions in bank stocks, and considering the attractiveness of bank stock dividends, they may be relatively resilient in the Japanese stock market."

Furthermore, for investors concerned about a further appreciation of the yen, bank stocks have an additional benefit in that they have limited sensitivity to foreign exchange fluctuations, whereas stocks more vulnerable to exchange rate risks, such as automakers and trading companies, face greater risks.

After the yen hit a seven-month high against the dollar at 141.70, the Japanese currency remains volatile.

Bank of Japan Governor Haruhiko Kuroda stated in a speech on July 31st: "As long as the economy develops as predicted, the central bank will continue to adjust interest rates," and he does not see 0.5% as a particular obstacle, urging investors to be prepared for the possibility of further rate hikes. This surprised investors, as the market had originally expected the central bank not to make any adjustments after raising rates to 0.25% earlier this year.

Strategists at BNP Paribas stated that they prefer banks over automakers, betting that banks will earn higher interest income