Japanese stocks plummet, "squeezing the bubble", is it time to buy the dip?
The market is betting on a rebound in Japanese stocks, with the growth rate of call options on the Nikkei 225 index exceeding that of put options. The TOPIX index currently has a P/E ratio of 13 times, much lower than US stocks. However, Japanese stocks still face risks from a stronger yen and further interest rate hikes by the Bank of Japan
After the record-breaking decline, is it time to "pick up bargains" in the Japanese stock market?
The Japanese stock market experienced a record three-day consecutive decline in early August, with a total market value evaporating by $1.1 trillion. Sectors that had previously surged, such as chips and banking, were hit the hardest, with the Nikkei index falling by 12% since the end of June, chip and semiconductor stocks dropping by 25%, and bank stocks declining by 16%.
With the market correction, the bubble in the Japanese stock market has been squeezed out, and the total market value is now around $6.1 trillion. This may make Japanese stock valuations more attractive. On August 11, Masayuki Murata, an investment executive at Sumitomo Life Insurance in Japan, said, "Given the current valuations, it can be said that 'we are at a level to buy on dips'." Investors believe that the stock market surged too much last month, but after the sell-off, the market is gradually returning to normal levels.
The current expected price-to-earnings ratio of the Nikkei index is 13 times, while the S&P 500 index is at 20 times. The valuation of the chip sector in Japan has also dropped from 35 times at the beginning of the year to 21 times.
Data from the Japanese derivatives market shows that market sentiment towards Japan remains positive, with the open interest contracts for bullish options on the Nikkei 225 index growing faster than bearish options, indicating an increasing bet on a market rebound.
Recently, the sudden rate hike by the Bank of Japan caught the market off guard, but after the sharp drop in Japanese stocks, Japanese authorities reassured the market that they would not tighten monetary policy quickly, avoiding further market turmoil. The recent labor market data in the United States has also somewhat alleviated concerns about an economic downturn. Meanwhile, major global tech companies continue to advance multi-billion-dollar investments in artificial intelligence infrastructure.
The turmoil in Japanese and even global stock markets seems to have temporarily come to an end. However, the market still faces the risk of a stronger yen, especially if the Bank of Japan further raises interest rates while the Federal Reserve in the U.S. relaxes its policies.
At the same time, global geopolitical tensions remain high, and the U.S. presidential election is approaching. Although the Nikkei Volatility Index has fallen from an intraday high of 85 on Monday to 45, it is still far above the long-term average level of 22