Japanese Market VolatilityJapanese Market Volatility

Japan's markets have struggled in recent weeks along with the turmoil in global financial markets, rattled by concerns over economic weakness in China and uncertainty over the direction of interest rates in the US. International investors, responding to troubling news out of China, reduced risk positions globally in late August, causing Tokyo stocks to decline along with equity markets across the globe. The yen rebounded against the dollar and other major currencies.

The weakness has continued through September and into early October, with net selling by international investors for several successive weeks driving the declines. The net buying or selling by foreign investors remains the single most consistent performance indicator in the Japanese equity market.

Foreign investors sold 2.9 trillion yen in Japanese equities in the five weeks from August 10 to September 11. As a result, the Nikkei 225 Stock average, after hitting an early August peak above 20,800, fell to a low just below 17,000 in late September.

Japanese corporate earnings, however, remain relatively strong, and the Price-to-Earnings ratios on Japanese equities are now at the lower end of their historical range, which is already enticing many global investors back to the Japanese equity market in the early days of October, causing the Nikkei to rebound to 18,300 at the time of this writing.

Other factors likely to support Japanese equities in the weeks ahead include the continued sound fundamentals in the US, stronger consumption in Japan thanks to an anticipated increase in real wages, a successful listing of Japan Post, positive corporate revisions due to the recent yen weakness and continued accommodative policies by the Bank of Japan.