Japanese Equity Market

The domestic stock market in August was driven by companies reporting strong earnings across both domestic and overseas demand sectors, with the TOPIX (Tokyo Stock Price Index) hitting an all-time high. Although the market softened toward the end of the month due to concerns over Middle East tensions and rising long-term interest rates in Japan and the U.S., it rebounded following better-than-expected earnings from a major U.S. semiconductor company, resulting in a 3.03% rise in the Nikkei Stock Average.

At the start of the month, the market fell—led by export-oriented stocks like automakers—due to concerns that the benefits of a weak yen would dissipate following coordinated intervention to buy yen. However, the market subsequently rallied; the TOPIX reached a record high driven by strong April–June earnings from companies catering to both domestic and overseas demand, as well as broad-based buying in AI/semiconductor-related stocks, banks, and defense-related stocks, supported by a retreat in expectations for an early U.S. interest rate hike. Later, while AI/semiconductor stocks faced heavy selling due to uncertainty regarding the Middle East and rising long-term interest rates, the market rebounded as investors sought out AI, semiconductor, and software-related stocks following a major U.S. semiconductor firm's strong earnings report, alongside growing appreciation for solid domestic corporate performance. By sector, gains were seen in Services, Marine Transportation, and Non-ferrous Metals, while Insurance, Glass & Ceramics, and Warehousing declined.

With a close eye on the monetary policies of both Japan and the U.S., the market is expected to face resistance to further gains in the first half of the month. While caution regarding profit-taking is warranted for the AI-related stocks that have driven the market thus far, buying interest in companies with solid earnings and strong financial results is expected to provide a floor for prices, leading to an overall upward trend.

Early in the month, we anticipate a nervous market with limited upside potential, characterized by profit-taking, particularly in the AI-related stocks that have previously driven the market, due to a confluence of factors: upcoming monetary policy events in both the U.S. and Japan (such as the FOMC meeting and the Bank of Japan’s policy board meeting, where expectations for a rate hike are rising); seasonal tendencies for institutional investors to lock in profits; and concerns regarding persistently high crude oil prices and long-term interest rates amidst escalating tensions in the Middle East. However, once the uncertainty surrounding monetary policy, which has weighed on the market, resolves into a scenario aligned with expectations following the central bank meetings, we anticipate a rebound in the stock market. This recovery would be supported by the stabilization of the robust U.S. macroeconomic environment, resilient corporate earnings, and renewed buying interest in companies that have reported strong results, alongside an influx of demand ahead of the ex-dividend dates for interim dividends from companies with fiscal years ending in March.

Conversely, a key risk factor remains the persistent concern over U.S. inflation, driven by the increasingly uncertain situation in the Middle East and the associated rise in crude oil prices. Should the Federal Reserve (FRB) adopt an even more hawkish stance and stoke fears of consecutive rate hikes starting in September, stock prices, particularly those of growth stocks, and specifically AI and semiconductor-related stocks with high valuations, could face further downward correction.