In Japan, Edward Ritchie, head of the stock department at Manulife Investment Management, stated that considering dividend yield and companies' commitment to buy back shares in the coming years, the Japanese stock market is expected to receive good support. It is estimated that the overall shareholder return rate of the Japanese stock market in 2024/25 will exceed 5%. Investors should continue to pay attention to high quality companies with strong pricing power and effective capital allocation. The Japanese stock market saw a cumulative decline of over 20% in the first three trading days of August, with a single-day drop of 12% on August 5. Ritchie pointed out that the main reason for the sharp decline in the market was the sudden change in expectations by global investors, who were concerned about a global economic downturn led by the United States. This view stemmed from some investors believing that the lack of a rate cut by the Federal Reserve at the end of July was a policy mistake, and weakening U.S. employment and industrial demand data confirmed their views. This change prompted a large number of investors to avoid risks. One of the largest risk trades globally is the so-called yen carry trade, where global investors short the yen and invest in the Japanese stock market. Investors seeking to reduce risk or close out yen carry trades is a main reason for the sharp strengthening of the yen and the decline in the Japanese stock market. Several other factors contributed to this shift in investor sentiment and intensified the market downturn. On July 31, the Bank of Japan raised its policy rate from 0% to 0.1% to 0.25%, leading to a stronger yen. The expected appreciation of the yen is expected to weaken the profit prospects of Japanese exporters, but the impact of the yen on overall corporate profits in Japan is no longer as significant as before. In fact, many Japanese manufacturers currently produce overseas, so the currency effect tends to be more in terms of translation (converting profits from overseas into yen) rather than transactional (selling products produced in Japan to overseas markets with yen costs as the base). Some commentators also believe that a rate hike in Japan could lead to a slowdown in the local economy, but this is not the main risk. Another reason for the market downturn is a shift in sentiment towards global tech stocks starting in early July. A leading tech company reported weak earnings on August 1, with quarterly profits plummeting by 85%, and subsequently announced a 15% workforce reduction, deepening concerns about the growth prospects of tech stocks. Geopolitical tensions remain a persistent risk for investors, as tensions in the Middle East seem to be heating up again, although this was not the main reason for the sharp shift in market sentiment in early August. Ritchie stated that there was widespread selling in the market, with all sectors showing declines of over 10%. The financial sector (banks, insurance, and securities firms) performed the weakest, followed by trading companies and the automotive industry. The best-performing sectors were domestic and defensive industries, such as retail and healthcare, as well as railways and telecommunications. As market sentiment regarding further rate hikes has changed and with the 10-year bond yield falling (the 10-year Japanese government bond yield falling from over 1% to below 0.8%), the financial sector has been the hardest hit even though businesses are not exposed to yen currency risk. In addition, market pricing as of the end of July indicates that the chance of a 25 basis point rate hike by the Bank of Japan before the end of 2024 is 50%, but the current likelihood has fallen to close to 0%. These developments have changed the investment sentiment in the financial stock market. Japanese domestic and generally defensive industries have performed relatively well, reflecting a stable outlook for the Japanese local economy. Japanese consumers have long faced challenges with rising prices, and real wages only recently turned positive. The yen's strength has lowered import prices, which has had a positive impact on local Japanese companies and should help support the domestic economy. In terms of factors, growth and momentum stocks have been hit the hardest, while stocks of companies with high quality ratings and high free cash flow yields have experienced smaller declines. The extent and impact of the unwinding of yen carry trades on the Japanese stock market remains uncertain. However, drawing lessons from past market sell-offs, such as the sell-off triggered by the Fukushima nuclear disaster in March 2011 or the COVID-19 pandemic in March 2020, markets rebounded after brief and sharp declines (both sell-offs saw drops of 16% to 18% in less than a week). Currently, the price-earnings ratio of the Japanese market is 12 times, suggesting a fairly reasonable valuation, with companies making conservative profit forecasts. Based on an average exchange rate of 140 yen to one US dollar, earnings for the fiscal year 2024/25 are expected to remain stable. In comparison, the price-earnings ratio in the US market is 22 times, indicating significantly higher valuations. Considering dividend yield and companies' commitment to buy back shares in the coming years, the Japanese stock market is expected to receive good support. It is estimated that the overall shareholder return rate of the Japanese stock market in 2024/25 will exceed 5%. Investors should continue to pay attention to high quality companies with strong pricing power and effective capital allocation. If the market decline presents investment opportunities with potential high returns, or reaches a reasonable price level for investors, they should seek opportunities to increase holdings of some high-conviction positions. Manulife Investment Management maintains its view on Japan: Japan is undergoing a transition from deflation to inflation, and companies with pricing power will be able to sustainably raise prices. In this environment, the profit and free cash flow of Japanese companies will grow more steadily, helping to drive continued revaluation of the Japanese stock market. Manulife Investment Management states that before the market decline, the Bank of Japan is expected to raise rates once or twice by 2024, and further hike rates in 2025 to normalize interest rates. The Bank of Japan has not defined a specific level for normalizing rates, but it should be above the current 0.25% level. The market is no longer expecting a further rate hike in 2024. After all, the Bank of Japan's further rate hikes will depend on whether the inflation rate remains elevated (Japan's consumer price index is currently at 2.8%). The recent strength of the yen has led to a decline in import prices, which may help curb rising inflation. The unwinding of yen carry trades implies that investors are no longer affected by large fluctuations in the yen. This will give the Bank of Japan greater flexibility to take further rate hike actions in the future without worrying about causing a chain reaction in the financial markets.