Japanese stocks continue to decline, all blame on the United States

The curtain on the adjustment of the Japanese stock market may have just been lifted.

This week, the Japanese stock market encountered "Black Monday", with the Nikkei 225 index plummeting 4.05%, marking the largest single-day drop since September 30, 2024, making Japanese stocks the worst-performing market in Asia this year.

Citigroup analysts Ryota Sakagami and Keishi Ueda released a report that day stating that the pullback in the Japanese stock market is not only directly influenced by U.S. tariffs but also because the market is beginning to fully consider the risks of a U.S. economic recession.

Nomura Securities analyst Tomochika Kitaoka believes that the tariff risks have not yet been fully reflected in the valuation of the Japanese market, stating that after the implementation of the "reciprocal tariff" policy, there is still room for Japanese stocks to decline, and the profitability of the Tokyo Stock Exchange index will be lowered.

As of today's midday close, the Tokyo Stock Exchange index fell 0.64%, closing at 2644.63 points.

Citigroup: The Tokyo Stock Exchange index may fall to 2550 points

Citigroup expects that if the U.S. economic recession is priced in by the market, the Tokyo Stock Exchange index may fall to 2550 points, equivalent to a price-to-earnings ratio (PER) of 12.5 times.

The report further points out that this target level is based on three key factors: first, the uncertainty of the U.S. economic outlook remains a recent risk; second, although U.S. stocks have adjusted significantly, they have not fully reflected the economic recession; third, Japanese companies may provide conservative guidance during their fiscal year performance releases, which will further suppress the stock market.

In the current environment, Citigroup recommends that investors focus on value stocks, low-risk stocks, and turnaround stocks—these stocks may exhibit strong resilience during market adjustments.

Citigroup noted that if concerns about the U.S. economy persist, long-term interest rates in Japan and the U.S. may decline, and this may be more reflected in the decline of real interest rates rather than a decrease in inflation expectations.

According to historical data analysis, when real interest rates in Japan and the U.S. decline simultaneously, domestic demand and defensive sectors typically perform well, such as the service and food industries; while external demand sectors, cyclical sectors, and financial sectors such as securities, insurance, and banking tend to perform poorly.

Additionally, value stocks, low-risk stocks, and turnaround stocks usually perform strongly.

Nomura: 40% of tariff risks remain unpriced

Nomura Securities holds the same view, believing that the current valuation of the Japanese market reflects some expectations of economic slowdown and profit decline, but it is not sufficient.

In a research report released on Monday, Nomura pointed out that the market's reaction to tariff risks typically lags two to three weeks after the event occurs, currently, the Japanese market may have digested over 60% of the tariff risks, but has not fully reflected all potential risks.

The report cites historical data stating that during the first term of the Trump administration, after the implementation of tariff-related policies, the Tokyo Stock Exchange index averaged a decline of 2.5% within two to three weeks, followed by a recovery in the subsequent weeks

Nomura expects that the reciprocal tariff policy will lead to a 12.5% or 25% decline in U.S. sales, based on a 20% contribution margin, the recurring profit of the Tokyo Stock Exchange Index will decline by approximately 3.8% or 7.7% respectively, with industries such as transportation equipment, rubber products, pharmaceuticals, and retail trade facing significant downside risks.

The report further points out that if it is in a recession scenario, based on an estimated price-to-earnings ratio of 13 times, the bottom of the Tokyo Stock Exchange Index may be around 2500 points.