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Shares in Toyota, Panasonic and Japan’s biggest banks were among the biggest victims of a huge rout of Tokyo stocks on Thursday, as investors absorbed the previous day’s unexpected interest rate increase by the Bank of Japan and a renewed surge in the yen.
Following the BoJ’s decision to raise its benchmark interest rate to 0.25 per cent — the highest level in 15 years — the yen continued to strengthen against the dollar, reaching ¥148.56 during early Thursday trading.
The Japanese currency has risen 4 per cent over the past two weeks as hedge funds rapidly cut their exposure to speculative yen short positions. Traders are guessing the majority of such bets have been cleared from the market and are now focusing on how much further the BoJ’s rate-raising cycle might run.
The yen was boosted by the surprise nature of the BoJ’s rate increase, and its run is now being driven by a shift in market perception about the way the BoJ is setting its monetary policy, said Bank of Singapore’s chief economist Mansoor Mohi-uddin. “You have now got uncertainty in the market about the BoJ’s reaction function and about the pace of future rate hikes,” he said.
The yen’s rally, which began in mid-July and was partly propelled by a bout of government intervention, is now being driven by expectations that Japan’s central bank has begun a process that could produce at least two more rate increases over the next 12 months, even as the US Federal Reserve looks primed to begin cutting.
Japanese stocks, as measured by the broad Topix index, fell as much as 3.6 per cent on Thursday. Many of the hardest-hit companies were carmakers and other manufacturers with earnings that are mechanically boosted by yen weakness.
But some of the fiercest selling was directed at Japan’s big property stocks, which have thrived during the country’s long era of ultra-loose monetary policy but now face a different environment. Shares in Mitsui Fudosan and Mitsubishi Estate fell 8 and 9 per cent, respectively.
Beyond the turmoil created by the strengthening yen and rising rates, Japan’s largest company, Toyota, disappointed the market when it released April-June results without an expected upgrade to its earnings forecast. Its shares fell more than 8 per cent on Thursday.
“A lot of people were not expecting that Bank of Japan hike on Wednesday and all the crowded trades suddenly looked exposed,” said one broker at a Japanese investment bank, adding that the disappointing Toyota results and the yen’s sharp rise had been taken as a trigger for selling a wide range of stocks.
Shares in Isetan Mitsukoshi, Japan’s biggest department store chain and a huge beneficiary of foreign tourists exploiting the weak yen, fell by more than 10 per cent. Shares in the bread maker Yamazaki Baking, which had been a darling of investors looking for exposure to rising food prices, dropped more than 18 per cent.
“There was just nowhere for investors to hide today,” said the broker.
Akira Otani, senior Japan economic research adviser at Goldman Sachs, said the central questions for investors attempting to judge future BoJ moves would be whether wage growth accelerated over the summer and whether this would be firmly passed on to services prices.
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