Tokyo’s stock market saw a slight rebound on Tuesday morning as investors capitalized on oversold companies, reversing some of the losses from a five-day Nikkei losing streak. The Nikkei 225 recovered 35 points by noon, while the broader Topix index also rose. However, uncertainty loomed due to concerns about the U.S. Federal Reserve’s upcoming policy decision and the strength of the yen. While some strategists are advising the unwinding of currency hedges to capitalize on potential yen appreciation, the stronger yen poses risks for Japan's export-driven economy. Global concerns over slowing economic growth continue to weigh on market sentiment.

Tokyo Stocks Rebound as Investors Seek Bargains

Nikkei and Topix Indices Recover Modestly Despite a five-day losing streak that saw the Nikkei 225 skid by nearly 2,500 points, Tokyo stocks managed to pare losses on Tuesday morning. The Nikkei 225 gained 35 points, or 0.09%, to reach 36,250, while the broader Topix index climbed by 9 points, or 0.34%, reaching 2,589. This modest recovery was driven by bargain hunters snapping up oversold companies, though the overall sentiment remained cautious as investors awaited key U.S. inflation data.

Currency Strength and Hedging Strategies Under Review

Impact of Yen Strength on Japanese Stocks Expectations of yen strengthening have prompted major financial institutions like JPMorgan Chase, UBS Group, and BNP Paribas to reconsider their currency hedging strategies. The yen’s appreciation against the U.S. dollar, fueled by Japan’s improving economic conditions and the Bank of Japan’s rate hikes, has been a mixed blessing. While a stronger yen signals economic recovery, it also makes Japanese equities more expensive for foreign investors and poses risks to the earnings of export-dependent companies. UBS, for instance, has downgraded its Japanese stock outlook to underweight in local currency terms, despite raising its year-end yen forecast to 145 against the dollar.

U.S. Dollar and Yen Dynamics Affect Market Sentiment

Currency Movements Reflect Fed Policy Anticipation The U.S. dollar climbed to the mid-143 yen range in Tokyo as receding expectations of a substantial Federal Reserve interest rate cut contributed to dollar strength. At noon, the dollar fetched 143.40-41 yen, compared to 143.40-41 yen in the previous session. Meanwhile, the euro was quoted at $1.1035 and 158.24-27 yen, indicating relatively stable movement across major currencies. These shifts reflect growing investor uncertainty about the Federal Reserve’s policy direction, which is seen as a key determinant for future currency movements.

Global Economic Concerns Keep Markets Cautious

Uncertainty Ahead of U.S. Inflation Data While Wall Street's gains provided some support for Tokyo’s stock market, caution persisted due to concerns about upcoming U.S. inflation data. "The market is focused on the upcoming Fed policy meeting, with investors hesitant to tilt their positions in any particular direction," said Maki Sawada, a strategist at Nomura Securities. This hesitation reflects broader fears about slowing global economic growth, which have weighed on market sentiment and tempered the rebound in Tokyo stocks.

Japanese Equities and Regional Performance

Topix Outperforms Regional Benchmarks Despite Setbacks Despite recent volatility, the Topix index has performed relatively well in 2024, rising 7.1% year-to-date, outperforming the regional MSCI AC Asia Pacific Excluding Japan Index’s 5.4% gain. The Topix also outpaced the Hang Seng Index and South Korean Kospi, highlighting its resilience in the face of global economic headwinds. However, the index has recently given up some gains as worries about a global economic slowdown intensify, raising questions about its sustainability.