(Bloomberg) -- One of the year’s most reliable stock investments has quickly turned into the world’s biggest money-loser after a selloff in Japan that few saw coming.
The Topix index sank about 6% Friday, completing a two-day drop of more than 9% in the wake of the Bank of Japan’s interest rate hike on Wednesday and Governor Kazuo Ueda’s hawkish messaging. The fall, which was the largest since the tsunami that triggered the Fukushima nuclear disaster in 2011, wiped away almost $600 billion in market value, according to data compiled by Bloomberg.
The scope of the plunge has been remarkable, given that shares traded largely stable into the BOJ meeting, and that market participants knew that a rate hike was possible. Investors pointed to the yen’s surge through the 150 milestone versus the dollar, macro funds shorting Japanese stocks in favor of US equities, and volatility upending trend-following commodity trading advisers, who unwound some of their positions.
“I didn’t expect stocks to fall this much — it’s a disaster,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo. “This might be temporary, but Japanese stocks are in their worst situation.”
The moves underscore the vulnerability of Japanese assets to wild price swings as the central bank raises borrowing costs in an economy that’s adjusting to inflation after decades of stagnation. The yen is rising on the new outlook for interest rates, which in turn threaten to erode the earnings of exporters who drove the nation’s equities higher for much of this year.
“Everyone is spooked about where dollar-yen may be headed,” said Chisa Kobayashi, Japan equity strategist at UBS SuMi TRUST Wealth Management Co. “There is a great deal of concern that it might lead to a deterioration in earnings.”
The yen’s rally this week to a four-month high against the greenback hammered exporters Friday including Honda Motor Co., Hitachi Ltd. and Mitsubishi Heavy Industries Ltd.
“The impact of the yen was not priced in fully through Thursday,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan. “The market became more aware of the BOJ’s hawkish turn after some delay.”
The prospect of higher yields dragged down real estate firms such as Mitsui Fudosan Co. Banking stocks, which should benefit from wider margins on lending, were swept lower in the selloff. The Topix Banks Index dropped 11% Friday, more than double the gain it made on Wednesday when the BOJ hiked rates.
“Its looks like heavy forced selling,” said Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte. “I can imagine many platform-based pod-like structure firms are aggressively cutting risk, causing blind selling across anything that’s even mildly crowded.”
The losses across the market over the two days totaled ¥89.2 trillion, equivalent to $599 billion based on Friday’s exchange rate. Both the Topix and the Nikkei 225 Stock Average have now entered technical corrections, with drops of more than 10% from the record highs set in July.
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Commodity trading advisors, or CTAs, that use trend-following strategies were hurt by a “violent momentum-play reversal” as volatility increased, according to Masanari Takada, a quantitative and derivatives strategists at JPMorgan Chase & Co.’s securities unit in Japan.
“The uptrend has completely turned around in the short term,” said Ryuta Otsuka, a strategist at Toyo Securities Co. “CTAs and others are probably turning to sellers at once.”
Once the main drivers of the market’s ascent, foreign investors sold net ¥1.56 trillion Japanese cash equities and futures combined in the week that ended July 26, according to data from Japan Exchange Group Inc. The Topix tumbled more than 5% during that period, the most in four years.
Foreign sellers were a key factor again on Friday, said Yoshitaka Suda, a cross-asset strategist at Nomura Securities Co.
“Macro funds turned big short-sellers of the Japanese equities,” said Suda. “Macros mostly based in US and Europe are piling long positions in US equities while shorting Japanese stocks.”
There was also an element of panic among individual traders that fed into the downdraft, according to Invesco’s Kinoshita.
“Retail investors who’d benefited from the rally turned to ‘shock selling’,” he said. “The fall in sentiment among retail investors has significantly deteriorated, contributing to the drop in the broader market.”
A rotation out of large tech shares exacerbated the slump as signs of strain in the US economy led traders to reconsider whether Jerome Powell’s Federal Reserve is wise to hold off cutting interest rates before September. Data released Thursday showed US unemployment claims hit an almost one-year high while manufacturing shrank.
Tech shares were among the biggest decliners on the Nikkei, with Tokyo Electron Ltd. tumbling 12% and Screen Holdings Co. retreating 13%.
“The market has clearly turned bearish in the short term, and the mid-term trend of Japanese stocks may be starting to change on concern over US and Chinese economies,” said Otsuka at Toyo Securities.
--With assistance from Aya Wagatsuma, Momoka Yokoyama and Kana Nishizawa.
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