Overview of Recent Market Turmoil
Japanese equity markets experienced significant upheaval on August 1, 2024, with the Nikkei 225 index plunging 12.4%. This marked the largest percentage drop since Black Monday in 1987, erasing much of the year’s gains. Prior to the sell-off, the Nikkei 225 was up 10% year-to-date but has since fallen into negative territory.
Causes of the Market Collapse
The abrupt decline in Japanese stocks was primarily triggered by the Bank of Japan’s (BoJ) decision to hike interest rates, coupled with signals of potential future hikes in response to economic data. This move led to a surge in the Japanese yen, which, in turn, prompted forced liquidations among retail investors and the unwinding of a crowded short yen carry trade by institutions.
The situation was further complicated by shifting expectations for US Federal Reserve rate cuts following a disappointing jobs report. The combination of these factors contributed to the dramatic market sell-off.
Impact on Japanese Equity Funds
As a result of the market turbulence, many Japanese equity funds have experienced severe declines, wiping out their double-digit gains for 2024. The turmoil has caused significant losses across the board for Japanese equity funds, which had been performing well earlier in the year.
Key Fund Declines
A list of the 30 Japanese equity funds that have seen the biggest declines since the sell-off began on August 1, 2024, highlights the extent of the damage. These funds have suffered substantial losses, reflecting the broader turmoil in the Japanese equity markets.
Investor Outlook and Expert Opinions
Despite the current volatility, some experts remain optimistic about Japan’s equity markets. Idanna Appio, a portfolio manager at First Eagle Investments, suggests that once market volatility subsides, a gradual tightening of BoJ policy may be expected. Appio also views the yen as undervalued, with expectations for its appreciation over the medium term.
Ray Sharma-Ong, head of multi-asset investment solutions for Southeast Asia at abrdn, advises against panic. He points out that Japanese equity markets have historically shown resilience, citing a similar correction in May 2013 when the market fell 18% peak-to-trough but recovered quickly to new highs within months. Sharma-Ong attributes the current sell-off to the unwinding of the carry trade rather than fundamental changes in the Japanese economy.
Conclusion
The dramatic swings in Japanese equity markets have led to significant declines in most Japanese equity funds’ 2024 gains. While the immediate outlook is uncertain, historical precedents and expert opinions suggest that Japan’s equity market may rebound once current volatility subsides. Investors should remain informed and consider long-term fundamentals when assessing the impact of recent market events.
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