Unlock Editor's Digest for free
FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.
Just a few months ago, Tokyo's trading floors were in celebration mode, inviting journalists into their inner sanctums to watch on their giant screens as the numbers soared beyond the untouchable record of 1989. Japan was back, or so it seemed.
But — for all the signs of a sustainable recovery for once in Japan — perhaps this time was not so different after all.
At 20 minutes after the market opened on Monday, the Topix index It's already down 7 percent Today, the yen continues to rally against the dollar: one trading chief did his best to explain the situation.
“The Tokyo market is moving like it did during the global financial crisis, without a real financial crisis to blame,” he said. “But we’ve seen this kind of thing before. Japan is the place the investment world goes to for punishing risk.”
The speed and ferocity of the Japanese market correction is striking and may completely change the outlook 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 weighing on global investor risk appetite. Specific factors in Japan, in particular the 12% rise in the price of oil, and in against the dollar in recent weeks, are prompting a sudden rethinking of the earnings outlook for many Japanese companies.
Last Friday, the Nikkei 225 index suffered The Topix index posted its biggest daily point drop since the crash of October 1987, then broke that grim record on Monday, surpassing the “Black Monday” plunge. The Topix overall has fallen more than 20 percent since hitting its all-time high in July. Having been one of the world’s best-performing indexes until a few weeks ago, it is now 5 percent below its year-to-date levels.
None of this was supposed to happen, because this time it was different. Large foreign funds, partly looking for an alternative to China, were revitalized by the prospects of JapanWarren Buffett's Berkshire Hathaway had repeatedly increased its stakes in Japan's five largest trading houses, in what many interpreted as broad license to reevaluate the hidden gems of the Japanese market. The once docile Tokyo Stock Exchange appeared to be pressuring companies to invest their capital more efficiently. An expanded, government-subsidized investment program seemed well designed to attract a new generation of domestic investors to the Japanese stock market.
However, as the past few weeks have painfully reminded us all, Japanese rallies are always vulnerable to reversals due to the breadth, liquidity and nature of the stock market itself. This is particularly so now that many global funds have reduced their exposure to China and are focusing their de-risking strategy more narrowly on Japan. It is easier to sell Japan on a dip than any other Asian market and it is unusually attractive to take profits from it at the moment because this year's gains have been so good.
The Japanese market, due to the wide range of industry types and exposure to different themes, is often described by investors as a “guarantee of global trade.” The world generally buys into Japan when conditions look optimistic and when there are many important themes (such as semiconductors and artificial intelligence) to which Japanese companies are heavily exposed.
Combined with some strongly argued “this time is different” domestic Japanese themes, such as the end of deflation, the prospect of major domestic consolidation and a huge tourism boom, stocks have risen across the board.
As the market decides how and where to settle in the long term after the current fall, a critical question is how much of this is the fault of the small but important central bank, the Bank of Japan. crucial rate hike Last week, Japan was able to “normalize” after decades of ultra-loose policies, and will all this market chaos 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 deliberately not intervening.
The problem is that the Japanese market offers global investors a wide range of ways to express a wide range of concerns, whether global or specific to Japan. Unfortunately for Japan, the current situation simultaneously offers global reasons to reduce risk and domestic reasons – a combination that has not been seen for a long time.
Some traders say this may stop now. Now that the Topix has lost all of its gains for the year, profit-taking may have reached a natural limit. What is clearer is that Japan now has an exceptionally difficult task: convincing everyone that we are not simply seeing another repeat of Japan's historic selling spasms, and that this time it is really different.