UBS Warns Japan Stocks Will Keep Falling

The Japanese stock market has experienced significant fluctuations, with recent comments from UBS analyst Kelvin Tay highlighting the weak yen as a primary driver of market gains over the past two years. While corporate restructuring efforts at the Tokyo Stock Exchange contributed to some positive momentum, Tay emphasized that the yen's depreciation was the main factor behind the market's performance. However, the Nikkei 225 and Topix indices have recently entered bear market territory, declining over 12%. The yen's value has been impacted by the Bank of Japan's (BOJ) recent decision to raise its benchmark interest rate to approximately 0.25% and reduce its purchases of Japanese government bonds. As a result, the yen traded at 144.82 against the U.S. dollar, marking its lowest level since January. BOJ Governor Kazuo Ueda indicated that the current interest rate of 0.5% is not a ceiling, suggesting potential for further increases, which could further influence market dynamics. The unwinding of the "yen carry trade" has also played a crucial role in the yen's recent performance. Investors previously borrowed yen at near-zero interest rates to invest in higher-yielding U.S. assets. With the Federal Reserve hinting at possible rate cuts and the BOJ raising rates, the interest rate differential is narrowing, making such trades less appealing and potentially leading to a stronger yen. As the yen strengthens, Tay warns that the Japanese stock market remains unattractive for investment, indicating ongoing pressure on the market despite potential stabilization in currency values.