What Analysts Say About Triggers of Japan’s Stocks Rout

Japanese stocks had their worst day since 1987, with both the Topix index and the Nikkei 225 Stock Average entering bear markets as investors fled amid a surge in the yen, tighter monetary policy and U.S. economic concerns.

Forced margin selling among retail investors was seen as exacerbating the rout, while UBS Securities cut its index targets for Japan.

Here is what analysts are saying about who is offloading shares and why, and where the market may be headed from here:

Who’s selling?

Rina Oshimo, a senior strategist at Okasan Securities Co.

“Selling is being spurred by the unwinding of long positions and the involvement of trend-following hedge funds. Valuation and fundamental strategies are not applicable in some areas due to the panic selling aspect of the market.”

Takehiko Masuzawa, head of equity trading at Phillip Securities Japan

Kyle Rodda, a senior market analyst at Capital.Com

“The rapid move in the yen is putting downward pressure on Japanese equities, but it’s also driving an unwind of a major carry trade — investors had leveraged up by borrowing in yen to buy other assets, chiefly US tech stocks.”

Yen and BOJ

Rafael Nemet-Nejat, a senior portfolio manager at Jin Investment Management Pte

“This is a massive deleveraging that is occurring, triggered by the BOJ rate hike and the FOMC likely cutting in September causing a huge unwind in the carry trade.”

“Thus, many people long the weak JPY trades and soft landing scenario are being forced to unwind. The moves are extreme especially in crowded longs even if earnings are huge beats, likely indicating that funds are either blowing up and or experiencing a lot of pain.”

Tim Morse, an analyst at Asymmetric Advisors

“This is all yen driven - sudden plunge from 145 towards 142 makes further technical barrier break seem within reach.”

U.S. economy

Jumpei Tanaka, a strategist at Pictet Asset Management

“Japanese equities were adversely affected by the ‘Sahm Rule’ triggered by last Friday’s announcement of the US unemployment rate rising to 4.3%, which raised fears of a U.S. recession.”

“At the moment, the US Economic surprise index is showing a negative (worsening) trend, and investors are becoming increasingly wary of deteriorating U.S. economic indicators. In addition, the Jackson Hole meeting is coming up this month and the FOMC meeting next month.

Hideyuki Suzuki, a general manager at SBI Securities

“At the moment, the US Economic surprise index is showing a negative (worsening) trend, and investors are becoming increasingly wary of deteriorating U.S. economic indicators. In addition, the Jackson Hole meeting is coming up this month and the FOMC meeting next month.

Outlook

James Salter, CIO of Zennor Asset Management

“Our short-term concerns do not detract from our longer-term optimism on capital allocation change in Japan.” 

We do not expect this to have a radical impact on Japanese competitiveness or even earnings.”

Hiroshi Namioka chief strategist at T&D Asset Management Co. in Tokyo.

“With heightened volatility, the market will likely be rough over the next few days, but towards the end of the week it may rebound.”

Rupal Agarwal, Asia quantitative strategist at Sanford C. Bernstein

“We are at a point in the cycle where bad news is bad news. Do note, for Japan we have been recommending to look at quality stocks and add more exposure to domestic Japan since the beginning of the year, so this sell-off hasn’t changed our view.”

“From a long-term perspective, we still remain positive on the Japan structural story.”