Tokyo Market Outlook: Will September's contrarian nature offer a buying opportunity?

The Tokyo stock market entered September trading on the 1st, with the Nikkei Stock Average falling 96 yen from the previous session to close at 66,215 yen, marking a modest second consecutive decline. The market has yet to break free from stagnation, continuing to churn within a narrow range around the 25-day moving average, which runs horizontally in the upper 65,000 yen zone.

Rising long-term interest rates in both Japan and the U.S. continue to dampen investor sentiment. However, megabank and other banking shares have shone in recent sessions, a trend clearly reflected in the strength of the TOPIX. The TOPIX extended its winning streak to nine consecutive sessions today - its longest run in about 16 months - and at one point came within less than a point of its all-time high set on the 14th of last month.

U.S. equity markets were soft the previous session, with major indices such as the Dow Jones Industrial Average and the Nasdaq Composite declining, though the Philadelphia Semiconductor Index (SOX) managed a modest gain. Individually, SanDisk surged 5.5%, and NVIDIA also posted solid gains, with select semiconductor names bucking the broader weakness. As a result, the baton passed to Tokyo - and to the Nikkei in particular - under conditions that could not be called outright headwinds. That said, Nikkei 225 futures were pushed lower early in the morning, creating a slight sense of unease. True to form, the market gradually pared losses after the open and briefly moved into positive territory.

Nevertheless, it remains too early for semiconductor stocks - which suffered sharp declines following an extended rally - to stage a full-fledged recovery, as the correction has not yet run its course in terms of time. Even if the 50,000 yen level proves to be a floor for Kioxia Holdings Corporation <285A>, the stock appears to need a further period of consolidation. At this juncture, daily Ichimoku Kinko Hyo charts offer useful guidance for individual stock selection. ADVANTEST CORPORATION <6857> continues to drift indecisively, though it remains above the Ichimoku cloud. IBIDEN CO., LTD. <4062> and Fujikura Ltd. <5803> are on the cusp of clearing the cloud. By contrast, Kioxia, Tokyo Electron Limited <8035>, and SUMCO CORPORATION <3436> remain below the cloud and are still in a state of limbo. AI and semiconductor stocks have become increasingly divergent compared to some time ago - simultaneous broad-based rallies are harder to come by - but this is actually favorable for investors, as it makes selectivity more rewarding. While fundamentals matter, the current environment - after the earnings season has passed - favors a technically driven approach. Among semiconductor names, stocks such as IBIDEN that are on the verge of breaking above the cloud offer relatively higher expected returns.

Statistically, September has historically been a challenging month for investors. Over the 77 years since the Tokyo Stock Exchange reopened after World War II through last year, the Nikkei's monthly performance in September stands at 37 gains versus 40 losses - the only month with a negative record across the full calendar year. Looking at the past 10 years, foreign investors have not been net buyers in September even once, posting a 0-win, 10-loss record. Paradoxically, however, September is also recognized as a month that tends to offer buying opportunities - a well-known market anomaly. The famous Wall Street adage "Sell in May" has a lesser-known second half: "and come back in September." More precisely, the phrase cautions investors to stay away "until St. Leger Day," a British horse racing event held on the second Saturday of September, implying that the following Monday marks the time to re-enter the market on the buy side. The ideal in equity investing is to buy low and sell high, and September can be viewed as offering just such an opportunity.

In both Japan and the U.S., rising interest rates remain the primary factor holding back buyers. Today, the yield on newly issued domestic 10-year Japanese government bonds rose above the 3% threshold for the first time in about 30 years. Crossing 3% does not automatically signal a sell for equities - indeed, when the Nikkei reached its then-record high of 38,915 yen at the end of December 1989 at the peak of the bubble, the 10-year JGB yield stood at 5.72%. That said, after traveling so long through what might be called a "long tunnel without interest rates," investors' eyes have yet to adjust to the light.

If Japan is sensitive to rising rates, the U.S. is even more so. U.S. Treasury Secretary Bessent is attempting to forcibly suppress yields on long- and ultra-long-term Treasuries through a significant increase in buyback operations (repurchase and cancellation of long-term bonds) scheduled to begin on the 9th. Stanley Druckenmiller - a former colleague of George Soros and a senior contemporary - has criticized the approach as a superficial fix that fails to address the root cause of fiscal deficits, but Bessent has brushed off the criticism with a sharp rejoinder that could be read as a pointed counterattack. Bessent's words and actions already convey an unwavering resolve, suggesting that - at least in the initial phase - there is a strong probability that he will attempt to overwhelm speculative forces through measures that are expansive to an almost uncapped degree. If the Trump administration is determined to save face at all costs, this program stands a good chance of succeeding, at least temporarily - and if so, it could serve as a positive catalyst for equity markets in both Japan and the U.S. In the same week, the Major SQ (Special Quotation) calculation for the Tokyo market falls on the 11th. While most observers may expect the Nikkei to remain under pressure around that time, there is a growing sense that buyers could surprise to the upside.

Looking at tomorrow's schedule, the Bank of Japan will release August monetary base data before the opening bell, and BOJ Policy Board Member Hajime Takata will deliver a speech at the Sapporo Financial and Economic Forum during the morning session, followed by a press conference in the afternoon. After market close, August fiscal funds balance data will be disclosed. Domestic Uniqlo same-store sales will also attract market attention. Overseas, the Reserve Bank of New Zealand and the Bank of Canada are set to announce policy rate decisions, while U.S. investors will focus on the August ADP National Employment Report, July factory orders, and the Federal Reserve's Beige Book. Among major corporate earnings, Broadcom will report its May-July quarter results.

Source: MINKABU PRESS

*Translated by generative AI. Click here for the original article.