Japanese Stocks Topple Into Bear Market as Confidence Crumbles

(Bloomberg) — Japan’s Topix stock index slid 24% from a record high reached last month and the Nikkei 225 Stock Average suffered its worst one-day slump in yen terms as investor confidence evaporated.

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The Topix and Nikkei 225 tumbled 12% Monday, with both entering bear markets amid a surge in the yen, tighter monetary policy and the deteriorating economic outlook in the US. On a three-day basis, the Topix had its biggest drop in data stretching back to 1959.

Tech companies and banks were the heaviest drags on the Topix. The yen surged more than 3% versus the dollar on the unwinding of carry trades, extending its gains from a low last month to almost 14%. Banks dropped as yields of 10-year government bonds headed for the biggest plunge since 1999. Circuit breakers for index futures were set off multiple times.

“We are basically seeing a mass deleveraging as investors sell assets to fund their losses,” said Kyle Rodda, a senior market analyst at Capital.Com. “The rapidity of the move has caught me off guard; there’s a lot of panic selling now, which is what causes these non-linear reactions in asset prices to pretty straightforward fundamental dynamics.”

All 33 of the Topix’s industry groups have fallen since the Bank of Japan raised interest rates on July 31, triggering a surge in the yen that has cast a pall over the earnings outlook for exporters. Yen-funded carry trades were among the most popular in emerging markets as volatility remained low and investors bet Japanese rates would remain at rock bottom.

Even insurers and banks that were expected to benefit from higher rates are now some of the biggest losers since the BOJ’s hike as global equity markets slump. Mitsubishi UFJ Financial Group shares fell 18%, their biggest decline on record, as yields plunged.

“Many people long the weak JPY trades and soft landing scenario are being forced to unwind,” said Rafael Nemet-Nejat a senior portfolio manager at Jin Investment Management Pte. “The moves are extreme especially in crowded longs.”

Uncertainty over the stock market’s future increased the most on record, according to the implied volatility of the Nikkei 225.

Signs of weakness in the US economy sparked a slump on Wall Street on Friday and a plunge in Treasury yields. Nonfarm payrolls rose by 114,000 — one of the weakest prints since the pandemic — and job growth was revised lower in the prior two months. The unemployment rate unexpectedly climbed for a fourth month to 4.3%, triggering a closely watched recession indicator.

Once the main drivers of the market’s ascent, foreign investors sold net ¥1.56 trillion ($10.7 billion) Japanese cash equities and futures combined in the week that ended July 26, according to data from Japan Exchange Group Inc.

“The latest big selloff in equities, reinforced by US market’s downturn and led by technology stocks, has staged a big reset in terms of expectations for Japan equity returns for the rest of the year,” Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte in Singapore, wrote in a note.

Here’s more on what market participants had to say:

Rupal Agarwal, Asia quantitative strategist at Sanford C. Bernstein

“We believe the down pressure on market is likely to continue due to carry trade unwind and growth scare in US which is not what market has been pricing-in. We are at a point in the cycle where bad news is bad news.”

Hebe Chen, an analyst at IG Markets in Melbourne

“The tsunami of fear-fleeting has taken investors into uncharted waters, as the context that Japanese stocks will face appears too new and daunting to digest. The official start of a full-cycle tightening journey, which has been absent in the Japanese market for three decades, prompts extreme fear-of-the-unknown, potentially keeping both domestic and global traders on edge for a while.”

Takehiko Masuzawa, head of equity trading at Phillip Securities Japan

“Selling is bringing in more selling, people are dumping shares. The stage of selling mainly futures has long passed. Now futures players such as CTAs have not just closed their long positions but are also piling up new short positions. Today there’s risk-off selling centered on cutting losses from long positions.”

Rina Oshimo, a senior strategist at Okasan Securities in Tokyo

“Although the market is currently in a ‘storm,’ Japanese stocks will gradually find a place to settle down along with the U.S. stock market,” she said. “Selling is being spurred by the unwinding of long positions and the involvement of trend-following hedge funds. Valuation and fundamental strategies are not applicable in some areas due to the panic selling aspect of the market.”

Vishnu Varathan, head of economics and strategy for Mizuho Bank in Singapore

“It is too early to tell if the summer heat will abate. But it is certainly a case of a conspiracy of ‘risk off’ triggers. The BOJ from what it did (hike and signal more) and the Fed for it has not (cut and commit to emphatic cutting) are conspiring to undermine precariously rich markets.”

Hideyuki Suzuki, a general manager at SBI Securities

“There is a general pattern of a reversal from the previous year’s data and the BOJ is not likely to raise interest rates further and will likely not be possible looking at the pace of the stock prices.”

Jumpei Tanaka, a strategist at Pictet Asset Management

“Until the bottoming out of USD/JPY is confirmed, aggressive buying of Japanese equities is likely to be restrained. At the moment, the US economic surprise index is showing a worsening trend, and investors are becoming increasingly wary of deteriorating US economic indicators.”

–With assistance from Abhishek Vishnoi.

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