Previously, a series of weak U.S. data triggered recession trades, compounded by the "hawkish" stance of the Bank of Japan (BOJ) in its July rate decision, leading to the unwinding of yen carry trades, which caused U.S. and Asia-Pacific stocks to experience "Black Friday" and "Black Monday" in succession.

This Friday, BOJ Governor Haruhiko Kuroda will attend a hearing in the Japanese Diet to explain why the bank raised interest rates in July. Although market turmoil in recent times has led to a reduction in expectations for further BOJ rate hikes, some asset management giants are still betting on another rate increase by the BOJ within the year. Japanese assets continue to be favored by investors. After "Black Monday," many active investors took the opportunity to bottom-fish in Japanese stocks, with the purchase scale reaching the largest in nearly two months. Amid the continued unwinding of yen carry trades, hedge funds have also taken a net long position on the yen for the first time in three years.

Several asset management giants are betting against the market on further BOJ rate hikes. The overnight swap market's bets on another rate increase by the BOJ before the end of the year have dropped from over 60% at the beginning of the month to about 34%. Previously, to soothe the market, BOJ Deputy Governor Masayoshi Amamiya hinted that policymakers would avoid rate hikes when the market is unstable, which many investors saw as a signal of the BOJ shifting back to a "dove" stance. Subsequently, the leadership contest within Japan's ruling party further cast a shadow over the prospects for near-term rate hikes.

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However, some globally renowned asset management institutions still adhere to their previous judgments. Li Zhennan, Senior Economist for Asia at Pictet Wealth Management, told Yicai Global that the main reasons for the BOJ's choice to raise rates again at the July meeting include Japan's economic growth and inflation development being roughly in line with its expectations; the initiative to increase wages has gradually expanded, thus the Japanese authorities have more confidence in a virtuous cycle between wages and inflation; and under the weak yen in the previous months, the acceleration of import prices poses an upward risk to prices. Regarding the future path, he said that despite the many uncertainties surrounding Japan's neutral interest rate level, he still expects the BOJ to gradually raise rates further, bringing the policy rate closer to the nominal neutral rate, as suggested by the bank's April meeting.

Vanguard, the world's second-largest asset manager, still bets on the possibility of the BOJ raising rates by another 50 basis points before December and has doubled its short positions in Japanese government bonds based on this judgment. Ales Koutny, Head of International Rates at Vanguard, believes that the BOJ will need to raise rates faster than expected. "Some people think that Masayoshi Amamiya's comments mean the BOJ will not raise rates again, but I think it's just a reassurance for the market. After Japan ended its decades-long struggle against price stability and deflation, wage increases can continue to boost the domestic economy and open the door for up to two more rate hikes this year," he said.

Asset management firm M&G Investment Management is also betting on the prospect of the BOJ continuing to raise rates within the year, continuing to increase its short positions in Japanese government bonds and simultaneously increasing its yen holdings. Further rate hikes would stimulate further appreciation of the yen, and Japanese government bond yields would also continue to rise gradually. M&G fund manager Eva Sun Wai said, "We believe the BOJ's attitude may be more hawkish than the market hopes. I would not be surprised if the BOJ raises rates slightly again before the end of the year."

RBC BlueBay Asset Management is also looking to increase its sales of 10-year Japanese sovereign bonds. Mark Dowding, the firm's Chief Investment Officer and a long-term bear on Japanese government bonds, said, "The trades in Japan over the past few weeks have cost us, but we have not been forced to close positions. The data and news still support our view, and we want to be patient with this stance." In addition to betting on the rise in shorter-term Japanese government bond yields, these institutions have also begun to engage in yield curve flattening trades, buying Japanese bonds with 30-year or longer maturities.

Japanese stocks have been massively bottom-fished. Documents submitted to the Japanese Ministry of Finance show that during the period when the Japanese stock market suffered its largest decline since October 1987 on August 5, renowned active investors Yoshiaki Murakami, Tokyo Strategic Capital Inc., and the fund under the UK-based Nippon Active Value Fund Plc collectively bottom-fished 2.8 million shares of Japanese stocks, recording the largest scale in at least the previous 60 days. The companies purchased include Sumitomo Mitsui Construction Co., Ltd. and car retailer Yellow Hat Co., Ltd., among others. Documents show that other active investment funds that increased their holdings in Japanese stocks on August 5 include Singapore-based Effissimo Capital Management and 3D Investment Partners, as well as U.S.-based Dalton Investments. When shareholders holding more than 5% of a company's shares see a change in their holdings exceeding 1%, they are required to submit documents, which can only be traced back 60 days.Active investors have been increasing pressure on Japanese companies to continue improving shareholder returns, which is also a shared goal with Japanese policymakers. It is the improvement in corporate governance by Japanese policymakers that has sparked investment interest in the Japanese stock market from global investors, including the "Oracle of Omaha," Warren Buffett.

Masatoshi Kikuchi, the Pan-Asia Chief Equity Strategist at Mizuho Securities Co. in Tokyo, stated that active investment funds are contrarian value investors, "They might think this crash is the best buying opportunity." He added that traders often follow funds with good performance records, including Murakami and 3D Investment Partners, thus anticipating a greater potential for the Japanese stock market to rise following these investors' bottom-fishing in Japanese equities.

Bruce Kirk, the Chief Japan Equity Strategist at Goldman Sachs, also noted that after the Japanese stock market experienced its largest decline since 1987, foreign capital is considering buying Japanese stocks again as the market gradually stabilizes. "We were very concerned that the scale of the pullback might temporarily deter foreign investors, but it does not seem to be the case at this stage. The level of interest from some foreign investors has actually increased significantly." He also advised investors to take advantage of the previous pullback to buy in, as the recent sharp drop in Japanese stocks was more technical than fundamental, unlike during the 2008 global financial crisis and the 2011 Fukushima nuclear power plant accident, when there were social and systemic risks.

At the close of the morning session today, the Nikkei 225 index rose by 1.7% to 38,015.87 points, and the Tokyo Stock Price Index (TOPIX) increased by 1% to 2,668.52 points, leading the Asia-Pacific stock markets. The "US economic recession trade" that previously caused market turmoil has been replaced by the "US economic soft landing trade" over the past week, and market expectations for the Federal Reserve to intensify rate cuts have also been reinforced.

Furthermore, the battle for the successor to the Japanese prime minister is also considered beneficial for Japanese stocks. The Chief Investment Office (CIO) of UBS Wealth Management Investment Director's Office released a report this week stating that Japanese Prime Minister Fumio Kishida announced he would not participate in the Liberal Democratic Party (LDP) presidential election to be held in September, which means that the next LDP leader will be appointed as prime minister without a public vote after winning the presidency. The House of Representatives election will be held no later than October 2025, but Kishida's departure increases the possibility of an early general election before the end of the year, as whoever becomes the next LDP leader is likely to have a higher approval rating than Kishida's current level, and conducting a broader vote during this "honeymoon period" may strengthen the ruling coalition's majority.

The Japanese stock market tends to perform strongly during the House of Representatives election period. Since 2000, Japanese stocks have averaged a 6% increase within 50 days before and after the House of Representatives election. In terms of industry, UBS continues to prefer banks, electronic components, high dividend-yield stocks, and domestically driven stocks whose earnings are less affected by exchange rate fluctuations, and believes that the risk-reward ratio in the semiconductor industry has also improved after the recent decline.

The yen, which has been weak for over a year, has also been net long for the first time since 2021 by hedge funds. According to data from the Commodity Futures Trading Commission (CFTC), as of the week ending August 13, hedge funds held a net long position of 86 yen contracts, valued at approximately $7 million. Although this figure is small, it is the first time in nearly three years that hedge funds have been net long on the yen. Just the week before, on August 6, hedge funds were still net short on nearly 20,000 yen contracts.

This is not unrelated to the recent large-scale closing of yen carry trades. One of the main drivers of the yen's weakness was the yen carry trade. Under Japan's low-interest-rate environment, a large number of traders borrowed cheap funds in Japan to purchase higher-yielding assets overseas. In early July, the US dollar once reached a 38-year high of 162, and the yen was extremely shorted. However, as the CFTC data shows, since early July, hedge funds have been reducing their short positions in yen, leading to a cumulative appreciation of about 10% against the US dollar during the period, outperforming other G10 currencies. Under such a rise, a large number of yen carry traders began to close their positions.

Akira Moroga, Chief Market Strategist at Aozora Bank, said before the release of the CFTC report: "The closing of carry trades may continue to support the yen, so it is difficult to assume that yen short positions will continue to increase as in the past. Panic-driven position adjustments are expected to end, but investors will continue to strive to buy yen."The Chief Investment Office (CIO) of UBS Wealth Management believes that, given voters' dissatisfaction with the yen's weakness and inflation, these two issues will become focal points in the Liberal Democratic Party's presidential nomination campaign. Among the at least five potential candidates currently, each has different stances on fiscal spending, central bank independence, and exchange rate policy. These policy divergences may cause fluctuations in the yen before a widely recognized candidate emerges. However, overall, UBS still forecasts the exchange rates of the US dollar to the Japanese yen to be 147 in September 2024, 147 in December 2024, 143 in March 2025, and 140 in June 2025. More broadly, the Federal Reserve's rate cuts by the end of 2024 should lead to a weakening of the US dollar against a variety of currencies in 2025, so even if there is a rebound, investors may still consider shorting the US dollar against the Japanese yen when it exceeds 150.