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Japanese stocks ended an already turbulent week in a nosedive, dropping to a six-month low as global funds fled risk and the strengthening yen continued to squeeze speculators out of the so-called carry trade.
The broad Topix benchmark of Japanese stocks, which peaked at an all-time high in mid-July and had been one of the world’s best-performing indices of 2024, fell 5.5 per cent in the first hour of Tokyo trading on Friday.
The sell-off followed a 3.2 per cent fall in the Topix on Thursday and heavy overnight drops on Wall Street led by growing market concerns around the US economy and resilience of the tech sector.
“We haven’t really seen these moves since Covid. Why are they so extreme? Because bad data in the US is now being treated as bad data,” said Takeo Kamai, head of execution services at CLSA in Tokyo. He added that weak economic data was now fuelling recession fears, whereas previously investors took negative US data as a sign that interest rates might come down and boost equities.
“Geopolitics and earnings are playing into this,” said Kamai. “Uncertainty is very high, and people are de-risking.”
The sell-off has been accelerated by heavily leveraged Japanese retail investors rushing to get out of a popular exchange traded fund, the Nomura NF Nikkei 225 ETF, traders said. The ETF fell 9.55 per cent on Friday as individual investors rushed to stem losses.
A 20 per cent plunge in Intel shares after US markets closed spooked Tokyo, where tech and semiconductor names have been among the most attractive to foreign investors.
Bellwether Japanese technology names, led by Tokyo Electron, SoftBank, Lasertec and Advantest all fell heavily in a rout that traders at two Japanese houses said appeared to have been led by large overnight sell orders from European and US long-only funds.
“It’s been a profit-taking frenzy this week. The big funds are taking risk off the table, and Japan is being hardest hit after a very strong run and now a macro backdrop that looks less bright,” said one senior broker at a Japanese securities house. “How long will this go on? We are not seeing signs of strong support here.”
The selling targeted many sectors but hit financials and industrials especially hard. Mitsubishi Heavy Industries, the defence contractor whose shares had surged to an all-time high this year and which had been a favourite of foreign investors, has fallen more than 13 per cent this week.
Part of the damage has been the stronger yen, with a chill cast over Japanese manufacturers whose profits are heavily bolstered when the currency is weak, traders said.
The Bank of Japan’s unexpected interest rate increase on Wednesday and the implication that it has entered a rate-raising cycle, even as the US Federal Reserve appears poised to cut rates, has propelled the yen far higher than many had expected.
At Friday’s level of ¥149.6 against the dollar, the yen is now 7 per cent higher than it was in mid-July, and at a level that currency traders said was continuing to deter speculators from the huge bets against the yen that had been built up throughout 2024.
For Japanese stocks, the dollar-yen rate has suddenly switched from tailwind to headwind, hitting exporters and forcing investors into fairly aggressive portfolio restructuring, analysts said.
“We don’t think that the Japan story is broken at this point, but the rules of the game have definitely changed,” said Bruce Kirk, chief Japan equity strategist at Goldman Sachs.
“The way investors have made money from Japan up until now and what will be required to make money from here will be different. So less focus on a narrow group of blue-chip exporters and more work around companies with higher domestic demand exposure.”
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