Japan’s primary stock indices have experienced a dramatic decline of approximately 20% from their peak levels in July, reflecting a steep drop in investor confidence. The recent downturn is attributed to a combination of factors including the yen’s appreciation, tightening monetary policies, and a weakened economic outlook in the United States.
On Monday morning, the Topix and Nikkei 225 Stock Average both plummeted over 7% in Tokyo trading. This sharp decline signals the potential onset of a bear market and sets the stage for the worst three-day performance since the 2011 Fukushima nuclear disaster. Trading of Topix futures was briefly halted by a circuit breaker due to the volatility.
Kyle Rodda, a senior market analyst at Capital.Com, remarked, “We are witnessing a significant deleveraging as investors liquidate assets to cover losses. The speed of this decline has been surprising, with widespread panic selling driving these erratic price movements in response to relatively straightforward economic fundamentals.”
The market’s troubles began after the Bank of Japan (BOJ) increased interest rates on July 31. This move led to a surge in the yen, negatively impacting the earnings outlook for Japanese exporters. Since the rate hike, all 33 sectors within the Japanese market have experienced declines. Even financial institutions and insurers, which were anticipated to gain from higher rates, have suffered losses. Shares of Mitsubishi UFJ Financial Group, for instance, saw a record intraday drop of 21%.
Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte, noted, “The recent significant selloff in equities, exacerbated by a downturn in US markets and led by technology stocks, has reset expectations for Japanese equity returns for the remainder of the year.”
Weakness in the US economy, underscored by disappointing nonfarm payroll numbers and a rise in unemployment to 4.3%, has contributed to Wall Street’s recent slump and a decline in Treasury yields. This situation has heightened market uncertainty, as explained by Hideyuki Suzuki, general manager at SBI Securities: “The US employment data has intensified uncertainty, and coupled with the yen’s strength, this has sharply driven down the market. A pause may be necessary at this juncture.”
Foreign investors, once pivotal in driving market growth, have pulled out a net ¥1.56 trillion ($10.7 billion) from Japanese equities and futures in the week ending July 26. During this period, the Topix fell more than 5%, marking its steepest drop in four years.
Market experts offer varying perspectives on the current turmoil:
Rina Oshimo, a senior strategist at Okasan Securities, commented, “Despite the current market turbulence, Japanese stocks are likely to stabilize over time alongside the US market. The ongoing selling is largely driven by unwinding of long positions and trend-following hedge funds, which has led to panic selling that overshadows valuation and fundamental strategies.”
Vishnu Varathan, head of economics and strategy at Mizuho Bank, observed, “It is premature to predict if the market’s intense volatility will subside. The BOJ’s actions and the Fed’s stance on rate cuts are contributing to a precarious market situation.”
Hideyuki Suzuki added, “A reversal from the previous year’s data is evident, and further interest rate hikes by the BOJ appear unlikely given the current pace of stock price movements.”
Jumpei Tanaka, a strategist at Pictet Asset Management, concluded, “Aggressive buying of Japanese equities is expected to be limited until there is confirmation of a bottoming out of the USD/JPY exchange rate. With worsening US economic indicators, investor caution is likely to persist.”
This sharp market decline underscores the complex interplay of global economic factors and their profound impact on Japanese equities.
