Citi recommends defensive stance on Japan amid BOJ uncertainty, recession fears

Investing.com-- Citi analysts said Japanese stocks are expected to gradually recover in September and October, but recommended a defensive stance on the market amid uncertainty over the Bank of Japan and the U.S. economy. 

Japanese stocks were battered by a global rout in financial markets this week, with the Nikkei 225 and the TOPIX both entering a bear market from record highs hit in July. 

Losses were in tandem with steep declines in U.S. markets, and were also driven by hawkish signals from the BOJ, after it unexpectedly hiked interest rates and flagged more potential increases this year. 

Citi analysts said that U.S. markets were at the “epicenter” of this market rout, especially after disappointing readings on the jobs market. Selling spilled over into Japan, with the impact amplified by a sharp appreciation in the yen, as the carry trade also came undone. 

The BOJ also remained a key point of uncertainty, especially over whether the central bank will hike rates further beyond its July hike. Any more hikes are likely to negatively impact the market, Citi analysts said, “ affirming the view of a rapid hawkish pivot by the BOJ.” 

Given the increased uncertainties, Citi analysts suggested a partial shift into defensive Japanese stocks and sectors with exposure to domestic demand, from “quality cyclical stocks”. 

“Until the summer storm passes, we believe it is important to continue incorporating domestic demand and defensive stocks,” Citi analysts wrote in a note. 

They also flagged some potential for a rebound in major cyclicals if fears of a U.S. recession proved to be unfounded.