Forced Margin Selling Seen Exacerbating Japan Market Rout

(Bloomberg) — The swift downturn in the Japanese stock market likely triggered a massive wave of forced selling among retail investors, deepening the rout.

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The Topix index plunged more than 7% with companies such as Mitsubishi Heavy Industries and Sumitomo Mitsui Financial diving more than 15%. The scale of selloff is such that some market players think individual investors are now being forced to dump stocks they had bought on margin.

Retail investors’ margin buying position rose to a 18-year high in late July even as the Nikkei slipped from its historic peak. Investors who have bought stocks using credit are often forced to close their positions when stock prices fall more than expected, unless they have enough extra cash for collateral to deploy.

“We see what appears to be forced selling from retail investors. They seem to be damaged,” said Takatoshi Itoshima, a strategist at Pictet Asset Management. “While it is possible that we are reaching a selling climax in the near term, I cannot be sure.”

Margin Trades of $30 Billion Add to Risk for Japan: Taking Stock

Hopes around higher wages and economic growth have encouraged Japanese investors to buy stocks. The trend was strengthened by new tax-free investment accounts that the government started this year. With the Nikkei 225 on the verge of wiping out almost all of its gains since the start of year, the bear market will test the durability of Japanese individual investors’ renewed appetite for domestic stocks.

“People who don’t have long experience in investment may have not gone through big market declines like this so the shock might be quite big,” said Masahiro Ichikawa, chief strategist at Sumitomo Mitsui DS Asset. “I think it will take a bit more time for the market to stabilize after such big falls.”

–With assistance from Mari Kiyohara.