For Japanese stock investors, the familiar first-quarter stock market frenzy seems to have returned this year...

According to market data, the Nikkei 225 index rose by 3.64% to 38062.67 points, which made the weekly growth rate reach an amazing 8.7%, the largest single-week increase since the beginning of the pandemic (April 2020). At the same time, the TOPIX index also rose nearly 3% during the day, with a weekly increase of about 8%.

As the Japanese stock market stabilized from last week's historic plunge on "Black Monday," all 33 sector classification indices of the TOPIX price index recorded weekly increases. The cumulative increase in the Nikkei 225 index has actually exceeded 20% since reaching a nine-month low of 31,156.12 on August 5, returning to the technical bull market zone.

Mitsubishi UFJ Morgan Stanley Securities market strategist Nobuhiko Kuramochi said: "With the enhancement of US business confidence and the depreciation of the yen, the Japanese stock market as a whole showed a rising trend today. At the current exchange rate level, I think the fair value of the Nikkei 225 index is around 38,000 points. If we approach this level, the rate of increase may slow down."

Hiroshi Namioka, chief strategist at T&D Asset Management Co., also pointed out that "the weakening of the yen and the steady US economic data have enabled Japanese exporters to make profits. As the market gradually settles down from the sell-off in the past month, stocks that suffered significant sales are being bought back."

Earlier, the retail sales data released on Thursday exceeded expectations, significantly boosting risk appetite in the Asian markets during the day. Data released by the US Department of Commerce's Census Bureau on that day showed that retail sales in July increased by 1% on a month-on-month basis, higher than Wall Street's widely expected 0.4%, reversing the slowdown trend in June and also setting a record high in one and a half years.

Foreign investors return strongly.

According to data released by the Japanese Ministry of Finance on Friday, after the Japanese stock market plummeted last week, Japanese decision-makers signaled more stability in the market, and foreign investors are now beginning to return to the Japanese market to seize buy-low opportunities after the stock price fell.

In the week ending August 10, foreign investors net purchased 521.9 billion yen ($3.51 billion) of Japanese stocks, reversing the net selling for three consecutive weeks.

The Nikkei 225 index plummeted 12% on August 5, setting the largest decline since Black Monday in 1987, but it rebounded by 10% the next day. The latest capital flow data undoubtedly highlights the strong pursuit of Japanese stocks by overseas investors, even after the yen carry trade closing has brought shocks to the wider market.

Bruce Kirk, Chief Japan Stock Strategist at Goldman Sachs, said that as the Japanese stock market stabilized after experiencing the largest drop since Black Monday in 1987, foreign investors are seeking to buy Japanese stocks.

Kirk pointed out, "We were very concerned that the scale of the Japanese stocks' callback would cause foreign investors' interest to decline, but it seems that this has not happened yet. If there are any changes, I think that some foreign investors groups are even more interested in Japanese stocks."

The Goldman Sachs strategist said that investors should take advantage of last week's correction to buy stocks, because the recent sell-off is more technical, rather than driven by fundamentals. This is different from the global financial crisis in 2008 and the Fukushima nuclear leakage incident in 2011, when there were social and systemic risks. After the Japanese stock market fell by more than 20% from the historical high point set in July, signs of overseas buying demand have appeared in the past few days.

It is worth mentioning that last week, foreign investors also reversed the trend of selling Japanese bonds for eight consecutive weeks-they net purchased 1.44 trillion yen in long-term Japanese bonds, the largest amount since May 11, and also net purchased 561.8 billion yen in short-term bonds.

At the same time as the huge rebound in the Japanese stock market, the carry trade around the yen in the foreign exchange market is also announcing the "return of the king" this week.

As the Nikkei Index surges, the market sentiment in foreign exchange market is changing for the better with carry trade transactions as well.

Since August 5th, the Japanese yen has depreciated by more than 5% against the US dollar. The tightening actions of the Bank of Japan, along with the anxiety surrounding the financial reports of American companies and the weak non-farm employment report, triggered a massive liquidation of yen carry trades two weeks ago, once pushing the yen to a seven-month high. However, as the subsequent liquidation actions came to an end one after another, and Japanese decision-makers made soothing statements, the yen is now once again returning to a depreciation path.

According to data from ATFX Global Markets, yen short positions increased by around 30% - 40% in the past week, with a large portion coming from hedge funds and high net worth clients.

Nomura International noted that many investors have started selling financing currency yen and investing the proceeds into other assets with higher yield. This indicates that corporate clients and hedge funds, who have always been enthusiastic about carry trades, are returning to these trades. Antony Foster, the head of G-10 currency spot trading at Nomura's London office, said that "carry trades are clearly coming back" after US retail sales data exceeded expectations.

Foster pointed out that he noticed several accounts selling yen and buying Australian dollars and British pounds.

"People's memory is short, and there are too many momentum traders in this field," said William Vaughan, deputy portfolio manager of Global Investment Management, in reference to carry trades.

Goldman Sachs' Kirk also pointed out that the stability of the yen exchange rate should bring comfort to US investors in Japanese stocks, and the current level of the yen may not pose a risk to corporate earnings or expectations.

It can be foreseen that if the Bank of Japan remains idle for a longer period of time, the temptation to return to carry trades will inevitably increase.

On August 23, Bank of Japan Governor Haruhiko Kuroda will speak at the Japanese parliament, and traders may gain more clues from his remarks. On the same day, Federal Reserve Chairman Powell will also speak at the Jackson Hole Global Central Bank Annual Meeting, which is also worth paying attention to for investors.

Editor/ping