Japanese stocks find bottom after recent rout, but recovery a ways off- Citi

Investing.com-- Japanese stocks appeared to have found a bottom after a mix of rate-hike angst and concerns over a U.S. recession sparked deep losses over the past week, Citi analysts said in a note.

But a recovery in Japanese markets was still a “little time away,” with markets likely to trade flat in the near-term before gaining enough confidence for a recovery, Citi said.

Japan’s Nikkei 225 and TOPIX indexes rebounded sharply on Tuesday, benefiting from bargain hunting and as mild declines in the yen supported export stocks.

But both indexes remained within bear market territory after plummeting between 12% and 14% on Monday, amid a broader rout in global equity markets. 

Citi lowered its year-end targets for the Nikkei to 41,000 points from 43,000 points, and to 2,900 points from 3,000 points for the TOPIX. 

Japanese stocks in particular saw outsized losses, also coming under pressure from a stronger yen, and as the Bank of Japan struck a more hawkish chord than markets were expecting.

The outsized losses were also driven by a drastic unwinding in the yen carry trade, which Citi attributed to an exacerbation in a position bias in a market “that has not seen risk-off activity since 2021.” 

The near-term outlook for Japanese markets remains dour, with Citi forecasting risk-off trades to “dominate.” The brokerage recommended defensive sectors in the near-term. 

Citi said that Japanese indexes were close to a bottom even assuming a mild recession in the U.S., and had little room to fall further.

Japan stock recovery still a ways off 

But Citi said that Japanese markets were likely to trade sideways in the near-term, and that it would be some time before the factors required for a recovery were in place.

The brokerage said that a brief U.S. recession, guarantees of stimulus support for the global economy and a less hawkish tone from the BOJ will be needed to spark a recovery in local markets. 

Still, Citi said it remained bullish on Japanese markets, citing a recovery in local demand, improving inflation and positive changes in corporate governance.