On Monday, Japan’s Nikkei 225 index underwent its worst day since 1987, falling by 12.4%, but in the days since Japanese equities have rallied back and are steadily climbing again.
Several factors were identified for the initial drop, including soft US employment data released in recent months and the Bank of Japan's (BOJ) decision to hike interest rates in late July.
This week, statements from the BOJ and on-the-ground market developments have started a recovery. Earlier today, Uchida Shinichi, deputy governor at the BOJ, said: "As we're seeing sharp volatility in domestic and overseas financial markets, it's necessary to maintain current levels of monetary easing for the time being.”
This decision to step in and issue a statement alleviating the concerns of further rate rises and acknowledging the current volatility has injected much-needed stability into the Japanese equity market.
At the time of writing, we are also during a recovery for the Nikkei 225, which surged by 10.4% on Tuesday, its best single-day performance since 2008, and bringing the index to around 35,000 – although it remains some way off its peak in July of 42,000.
As Naoki Kamiyama, chief strategist at Nikko AM noted, despite Monday’s volatility, economic sentiment on the ground in Japan has largely remained calm, with real wages and earnings continuing to rise and consumption improving as a result.
“Domestic demand remains strong, supported by the continuing rise in wages, which we believe could be the catalyst for a recovery by Japanese equities,” Kamiyama said.
According to experts at M&G, Japanese equities are set to remain an attractive investment opportunity even despite this market volatility.
Commenting on the recent market volatility, Carl Vine, FE Alpha manager of the £3.7bn M&G Japan Fund and £237m M&G Japan Smaller Companies funds, said: “The opportunity for the investor, then, is to either find ‘baby-with-the-bathwater’ situations or to add portfolio beta.”
With rising real wages, and statements from the BOJ providing financial security, Vine concluded that “Japanese equities represent an attractive, structural investment opportunity with an asymmetric prospective payoff profile”.