Just two months earlier, the outlook for Japanese stocks had never been brighter. June Aitken stated that there was “a compelling argument for long-term investments into Japanese equities.” The London-listed CC Japan Income and Growth Trust is one of the easiest ways UK investors can buy into the Tokyo stock market.
She said that a weaker yen, improved economic conditions, good governance reforms and an increased focus on capital efficiency should all be factors in determining valuations. Expertise in robotics, AI and other technology areas is a plus.
She wasn’t the only one. The mainstream investment opinion held that the Japanese market had finally emerged from a long-term slump after a series of false dawns. Japan was one of the most successful major markets in world until last month, with the Nikkei index surging about 50% in the two previous years.
The collapse of the share price on Monday has ended any complacency regarding the third largest economy in world. Nikkei dropped 4,451 points (12.4%) to 31,458, the biggest single point drop in Nikkei history and largest percentage fall since 1987.
The sell-off affected some of Japan’s most recognizable companies. Toyota Motor Corporation, Honda and Sony all saw their shares plummet by between 14 and 18 percent. SoftBank also suffered a big drop, falling by 19%. It is best known for its ownership of Cambridge-based chip-design group Arm Holdings. Fast Retailing (which owns Uniqlo) was down by almost 10%.
The Nikkei had a bad Friday, falling by 5.8 percent. Japan has now fallen by over 23 per cent during the last month. This is much more than any other major market, and is considered by some to be a “stock market crash”. By mid-afternoon Monday, the S&P 500 index, which is the standard for the United States was down only 6.3 percent over the same time period. The FTSE 100, however, was only 2.5 percent lower.
The recent wobbles in American technology stocks have soured the mood. The dim outlook for the US economic situation after Friday’s disappointment with lower than expected job creation has also dampened sentiment. The resulting sea of red on the screens of traders in Tokyo may have been a result.
Analysts say that Tokyo’s troubles are localised and have more to do the dramatic strengthening of the yen versus the dollar in the last few weeks. The turning point appears to have occurred on July 11, when the US inflation data was benign, making a US rate cut seem more likely. Japan was also contemplating another increase.
Rumours of currency interventions by the Bank of Japan also spread, and the currency rocketed to a new low, a 38-year high. The yen had already risen by 12 percent since the Bank of Japan raised its base rate, only the second increase in 17 years.
Japan’s massive export sector suddenly looked under pressure. The yen’s strength makes it difficult for Japan to compete against international rivals, and also reduces the value of its overseas profits when they are converted to their own currency.
The so-called carry trade in yen has added to the pressure. Arbitrage is a highly popular method of investing in which investors borrow yen at low rates and then use the money to purchase overseas assets, such as bonds and shares. After incurring large foreign exchange losses, investors have been forced to reverse their trades due to the surge in yen. The yen has also increased as a result. These losses have forced investors to sell their local assets.
The shift in the market has been dramatic. The shift has been seismic.
Kyle Rodda is a senior analyst of Capital.com. He said, “We are essentially seeing a massive deleveraging, as investors sell their assets to fund losses.”
Over the last year, global investors have been rushing into Japanese stocks. Warren Buffett was also involved, revealing last year that his holdings in the major trading conglomerates of Japan, including Mitsubishi, Mitsui, and Sumitomo, had increased. He said that the stock prices in Japan are “ridiculously cheap”.
The events of the last few days have completely erased gains made by domestic Japanese investors on Japanese stocks over the past year. For foreigners the gains are partially offset by the stronger currency.
A second piece of good news is that Japan only accounts for 6 percent of the global share value. This compares to about 40% at the peak in 1989. If the share price crash is mostly confined to Japan then the global impact on investors will be modest.
Some investors have already started looking for bargains in Tokyo. Joe Bauernfreund who manages £1 billion AVI Global Trust a FTSE 250 company, said that some of the recent share price drops were due to panic and not fundamentals.
Nihon Kohden – a Japanese manufacturer of ventilators and defibrillators – was one of his investments. It had the unfortunate distinction of being the worst performing stock in the Topix Index, falling by 24 percent on Monday.
Bauernfreund, however, was optimistic. He said: “We will add to some of these beaten up names over the next couple of days.”
Japan’s recovery may be a long way off, but there are still many who believe in it.
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