Japanese stocks saw a significant rebound on August 6, recovering 9% after a sharp selloff the previous day, which was worse than Black Monday, JPMorgan analysts highlighted in their note Wednesday.
They explained that real wage growth turned positive, signaling a gradual end to deflation, which, along with a meeting of the MOF, FSA, and BOJ, spurred market optimism.
Despite this rebound, JPMorgan says the market remains volatile following a sharp drop in early August that wiped out all year-to-date gains.
The selloff spread to global markets, driven by the unwinding of JPY carry trades post the July 31 BOJ meeting, leading to JPY appreciation against USD and a broad selloff in Japanese stocks.
JPMorgan analysts emphasize the need to monitor the risk of a US recession, but they see support levels for TOPIX at 2,450 and for the Nikkei 225 at 34,000.
The significant sell-off, prospects for the end of deflation, progress on corporate reforms, and positive wage growth are said to underpin these support levels.
The analysts expect upside potential over the medium term once market turmoil subsides.
"Even if a recession develops, we do not expect Japanese stocks, which have already sold off more than US stocks, to be under much downward pressure," JPMorgan stated.
The bank adds that the unwinding of JPY carry trades appears to be nearing its end, with the market pricing in JPY appreciation to ¥140/$, impacting corporate EPS by 10%, yet not justifying the market's 25% decline from its peak.
For investment, JPMorgan focuses on sectors resilient to JPY appreciation, with a domestic focus, defensiveness, and strong shareholder returns. They remain Overweight on industrial electronics, IT services, financials, and consumer-related sectors. Key investment themes for post-volatility include cutting-edge technology, digital transformation, renewable energy, aerospace and defense, and friendshoring.
Overall, while volatility may persist, JPMorgan sees potential for a medium-term recovery in Japanese stocks.
