January 10, 2025

A pedestrian checks the electronic stock board outside a securities company in Tokyo, Japan, Tuesday, December 25, 2018.

Ci Gaoan | Bloomberg | Getty Images

Japanese stocks fell for two consecutive days on Friday, hitting an eight-month low after the Bank of Japan raised its benchmark interest rate to the highest level since 2008.

this Nikkei 225 Index The index fell 5.81% to close at 35,909.7 points, its worst day since March 2020 and the first time it fell below the 36,000-point mark since January, according to Factset data.

The broader Topix fell 6.14% to post its worst day in eight years, closing at 2,537.6 points.

This is a stark departure from less than a month ago, when the Nikkei hit an all-time closing high of 42,224.02 on July 11.

Bruce Kirk, chief Japan equity strategist at Goldman Sachs, said in an interview with CNBC’s “Squawk Box Asia” that the Japanese market’s rebound has entered a “transitional phase.”

“So, yes, it’s very painful. Yes, the market is fundamentally shifting, but it’s not unusual,” Kirk said. “We don’t think the (rebound) story is broken, but the story is certainly evolving and will likely be accompanied by continued volatility and the pretty aggressive industry rotation that we’re seeing.”

Kirk explained that the rebound over the past two years has been driven by three factors: a weak yen that benefits blue-chip exporters and banks, expectations of normalization of monetary policy, and corporate governance reforms.

Last year and until June this year, the Japanese market had been the best-performing market in Asia.

“The rules of the game have definitely changed (now), especially in terms of interest rates and foreign exchange,” Kirk said, adding that investors are now reassessing industry positioning in the market.

There is a silver lining to this repositioning.

Kirk told CNBC that for the first time in about three years, investors are becoming more cautious about Japanese small and medium-sized companies due to a variety of factors, including their higher exposure to domestic demand and reduced vulnerability to foreign exchange fluctuations. interested.

“I think people are now looking at areas that are more focused on domestic demand, and that’s really putting Japan’s small (and) mid-cap stocks back on the map.”

everyone is in the same boat

Kirk detailed two possible reasons behind the Bank of Japan’s current reassessment after raising interest rates.

The first is that “investors do not believe that the Japanese economy can adopt a policy rate (rate increase) of 25 or 50 (basis points), and they do not believe that Japanese companies can make money (against the U.S. dollar) when the yen is below 150.”

The yen is currently trading at 149.4 against the dollar, having fallen below the 150 level since the Bank of Japan’s decision on Wednesday.

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Another reason for the sell-off could be that the market is very crowded, with investors putting money into a small group of companies, all of which have maintained their growth momentum over an extended period of time.

“When some fundamentals change, everyone is on the same side. That’s when you do see these very aggressive pullbacks and reversals.”

So, how long will this correction last and how deep will it be?

Kirk noted that over the past two years, the market has seen about seven “momentum pullbacks,” declining about 7% to 8% from peak to trough, with the market typically taking about two months to recover.

He said the current price trend is very similar to the market situation in December 2022 when the Bank of Japan revised its yield curve control policy.

The central bank finally The YCC policy was abandoned in March.

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