Japanese stocks are expected to gradually recover in September and October, analysts at Citigroup said, but they recommended a defensive stance in the market amid uncertainty over the Bank of Japan and the U.S. economy.
Japanese stocks have been hit hard by the global meltdown in financial markets this week, with both Japanese and U.S. stocks entering bear markets from record highs hit in July.
The losses coincided with sharp declines in US markets and were driven by hawkish signals from the Bank of Japan, after it unexpectedly raised interest rates and signalled more increases were likely this year.
Analysts at Citigroup said U.S. markets were “at the epicenter” of the decline, particularly after disappointing readings in the labor market. The selloff spread to Japan, with the impact amplified by a sharp rise in the yen and a pullback in the carry trade.
The Bank of Japan also remained a major point of uncertainty, particularly over whether the central bank will raise interest rates beyond its July hike. Analysts at Citigroup said any further increases would likely be a market drag, “reinforcing the view that the BOJ will take a quick hawkish stance.”
Given the growing uncertainty, Citi analysts suggested a partial shift to defensive Japanese stocks and sectors exposed to domestic demand, from “high-quality cyclical stocks.”
“Until the summer storm passes, we believe it is important to continue integrating domestic demand and defensive stocks,” Citi analysts wrote in a note.
They also pointed to some potential for a rebound in major cyclical stocks if fears of a U.S. recession prove unfounded.