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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Just a few months ago, Tokyo’s dealing floors were in celebratory mode — to the point of inviting journalists into their inner sanctums to watch the numbers on their giant screens soaring past the once untouchable 1989 all-time high. Japan was back, or so it seemed.
But — despite all the signs of a sustainable Japan recovery for once — maybe this time was not so different after all.
Within 20 minutes of Monday’s market open — the Topix index already down 7 per cent on the day and the yen still resurgent against the dollar — one head of trading did his best to explain the situation.
“The Tokyo market is moving like it did in the global financial crisis, without an actual financial crisis to pin it on,” he said. “But we have seen this type of thing before. Japan is where the investment world comes to punish risk.”
The speed and ferocity of Japan’s market correction is eye-catching, and may now completely reset views on a market that has recently been experiencing a renaissance. A painful combination of factors — fears of a US recession, the risk of a panic rate cut by the US Federal Reserve and deeply unsettling geopolitics — are hitting the global risk appetite of investors. Specific factors in Japan, notably the 12 per cent surge of the yen against the dollar over the past few weeks, are causing a lightning rethink on the earnings prospects of many Japanese companies.
Last Friday, the Nikkei 225 index suffered its biggest one-day points decline since the October 1987 crash, only to beat that grim record on Monday, surpassing the “Black Monday” rout. The broader Topix has now fallen well over 20 per cent since hitting its all-time high in July. Having been one of the world’s best-performing indices until a few weeks ago, it is now 5 per cent underwater year-to-date.
None of this was supposed to happen, because this time was different. Big foreign funds, in part looking for an alternative to China, were re-energised by the prospects in Japan. Warren Buffett’s Berkshire Hathaway had repeatedly raised its stakes in Japan’s five biggest trading houses, in what many took as a broad licence to reassess the hidden gems of the Japanese market. The once docile Tokyo Stock Exchange appeared to be cracking the whip for companies to deploy their capital more efficiently. An expanded, government-subsidised investment programme looked well-crafted to bring a new generation of domestic investors into the Japanese stock market.
Yet, as the past few weeks have painfully reminded everyone, Japanese rallies are always vulnerable to reversals because of the breadth, liquidity and nature of the equity market itself. This is particularly the case now that many global funds have reduced exposure to China, and are focusing their de-risking more tightly on Japan. It is easier to sell Japan into a rout than any other Asian market, and unusually attractive to take profits from it right now because the gains this year have been so good.
The Japanese market, because of the very wide range of industry types, and exposures to different themes, is often described by investors as a “warrant on global trade”. The world generally buys Japan when conditions seem upbeat and when there are plenty of big themes — such as semiconductors and artificial intelligence — where Japanese companies are strongly exposed to those.
Combined with some solidly argued “this time is different” domestic Japanese themes, such as the end of deflation, the prospect of big domestic consolidation and a huge tourism boom, shares had been driven higher across the board.
As the market works out how and where to settle in the longer term after the current rout, a critical question is how much of this is the fault of the Bank of Japan’s small but pivotal rate rise last week. Was Japan ever in strong enough shape to “normalise” after decades of ultra-loose policy and will all this market mayhem now force the central bank to return to the stock market as a supportive buyer? Domestic investors, who traditionally buy into foreign-led sell-offs, appear to be answering those questions by pointedly not stepping in.
The problem is that the Japanese market offers global investors a very wide range of ways to express a very wide range of worries, whether global or Japan-specific. Unfortunately for Japan, the current situation simultaneously provides both global reasons for de-risking and domestic ones: a combination that has not occurred for a long time.
It may, say some traders, stop around now. With the Topix shedding all its gains for the year, the profit-taking may have reached a natural limit. What is clearer is that Japan now has an exceptionally difficult task convincing everyone we are not seeing just another repeat of historic sell-Japan spasms, and that this time really is different.
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