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Can Japan Hold on to Second-Largest Equity Market Position?

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On Aug 3, China lost its position as the world’s second-biggest stock market to Japan. Understandably, trade war fears along with a slowing economy have been taking its toll on China’s stocks as the Chinese government is now striving hard to protect the economy.

On Jun 26, the benchmark Shanghai Composite Index officially entered the bear market. On the other hand, Japan’s corporate results have been robust, providing support to the markets there. Moreover, Japan’s economy is expected to bounce back in the April-June quarter after contracting in the first quarter that ended the longest growth run since the 1980’s bubble economy.

Trade War Fears, Slowing Economy Cripple China

China lost its position as the world’s second biggest stock market to Japan after a Thursday slump. On Aug 2, Chinese equities were a worth $6.09 trillion at market close compared to Japan’s $6.17 trillion. The Shanghai stock exchange declined almost 1%, while the CSI 300 that tracks blue chips traded in Shenzhen and Shanghai tumbled 1.7%. 

Understandably, Trump is chasing China like a dragon breathing dragon! Stocks fell further on Aug 3 as the Trump administration announced plans of imposing tariffs on another $200 billion worth of Chinese goods. The Shanghai Composite Index has fallen 17% this year, with industrial and tech stocks being the worst performers.

On Friday, shares of Chinese streaming giant iQIYI, Inc. (IQ - Free Report) fell as much as 6.3%. Shares of Baozun Inc. (BZUN - Free Report) , Bitauto Holdings Limited (BITA), JD.com, Inc. (JD - Free Report) and Sohu.com Limited (SOHU - Free Report) declined 3.9%, 0.9% 0.3% and 0.4%, respectively. Shares of Aluminum Corporation of China declined 1.2%. iQIYI has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

China’s stock market had overtaken Japan’s in 2014 and reached its peak in 2015, with equities worth $10 trillion. However, markets have been cooling down since then as the economy started slowing. On Jun 26, the benchmark Shanghai composite officially entered the bear market. 

The Chinese government’s concerns revolve around its economy that is weakening faster than expected, fueled by fears of a trade war with the United States. So much so that China’s central bank on Jun 24 said it will pump as much as 700 billion yuan ($107 billion) into the financial system by reducing the amount of deposits majority of the banks are needed to hold.

Japan Rebounding after First-Quarter Contraction

Japan reclaiming the crown as the world’s second biggest stock exchange doesn’t have a direct relation to China’s economic slowdown, but shows that it is slowly rebounding from the first-quarter contraction.

Moreover, Japanese companies have been posting robust quarterly results, which are giving strength to the market. Also, retail sales grew more than expected in June, rising for eight consecutive months, which is a positive sign that consumers are becoming more confident about the economy. Economists believe that Japan’s economy will bounce back in the April-June quarter. Also, the jobless rate is at a 25-year low of 2.2%, signaling a tighter labor market.

Shares of Honda Motor Company (HMC - Free Report) andAdvantest Corporation (ATEYY - Free Report) jumped 1.8% and 1.2%, respectively, on Friday. Shares of Subaru Corporation (FUJHY - Free Report) and Canon, Inc. (CAJ - Free Report) rose 0.6% each on Aug 3.

Summing Up

The United States’ recent threats of imposing tariffs on another $200 billion of Chinese goods saw Shanghai Composite Index falling once again, with China eventually losing its spot as the world’s second-biggest stock market.

At the same time, Japan’s economy is crawling back from its first-quarter contraction. Moreover, corporate results from Japanese companies have been robust. Also, retail sales have jumped for the eighth consecutive month, which is a positive sign that consumers are more confident about the economy. It now needs to be seen if Japan can hold on to its position as the world’s second-biggest stock market.

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