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(Bloomberg) — Turmoil in Japan’s financial markets boiled over Monday as the yen extended its rebound against the dollar to about 13% from July’s low and stocks tumbled into a bear market. Yields on benchmark Japanese government bonds slid by the most in more than two decades.
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The accelerating moves continued to take investors by surprise, hurting everyone from mom-and-pop traders of shares and currencies to large hedge funds and institutions. The slump in bond yields triggered record declines in the shares of Japan’s three biggest banks, wiping 12 trillion yen ($85 billion) from their market value in the past two trading days, as investors weighed the threat to interest income on lenders.
The sharp appreciation of the currency, which has gathered pace since the Bank of Japan increased interest rates on July 31, rumbled through global markets as it upended countless investment strategies that were built on cheap borrowing in yen. It’s a bitter outcome for the BOJ, which had taken painstaking care to gradually nurture inflation and then recalibrate borrowing costs without jolting markets.
“What a complex situation to be in for Japanese policymakers — a loose monetary policy kills your currency and a slightest hint of tightening breaks your stock market,” said Charu Chanana, head of currency strategy at Saxo Markets. The yen may get 140 to the greenback sooner rather than later if concern over the risk of a US recession continues to rise, which will further weigh on Japanese stocks, she said.
The Nikkei Stock Average Volatility Index rocketed to the highest level ever based on data compiled by Bloomberg back to 2001. The jolt reflected a snowballing of selling that leds to more selling, according to Takehiko Masuzawa, head of equity trading at Phillip Securities Japan.
The yen, which had been the worst-performing Group-of-10 currency during the first half of the year, was a tailwind for stocks by boosting the earnings of Japan’s powerful export industry.
All 33 of the industry groups represented in the Topix index have dropped since the BOJ raised interest rates. After falling into a correction on Friday with a slump of more than 10% from its July peak, the gauge has entered a technical bear market with the decline now around 24%.
“Falling stock prices mean that companies’ business performances are expected to deteriorate in the future, and if the economy weakens, credit spreads may face widening pressure as well,” said Noritaka Oda, head of debt syndication at SMBC Nikko Securities Inc.
The benchmark 10-year Japanese government bond yield slid 20.5 basis points to 0.75%, the most since 1999, according to data compiled by Bloomberg.
A large amount of the risk-off sentiment driving debt markets reflected worries over the US economic outlook. Concern is growing that the Federal Reserve is behind the curve with policy support and global investors are ditching risk assets and going into safe havens.
Yet the impact of the shift in yen has hit global carry trades far more than many market participants has anticipated.
“Everything is in the unwinding of the yen carry trade, the timing of the Fed cuts and US employment are not important in comparison,” said Pierre-Yves Gauthier, head of research at AlphaValue. “We’re categorical on that one, the rise of Japan interest rates are changing the game rules.”
Forced selling among retail investors also appears to have played a role in the swift downturn in the Japanese stock market. Retail investors’ margin buying position rose to an 18-year high in late July, even as the Nikkei slipped from its historic peak.
“We see what appears to be forced selling from retail investors. They seem to be damaged,” said Takatoshi Itoshima, a strategist at Pictet Asset Management. “While it is possible that we are reaching a selling climax in the near term, I cannot be sure.”
Japan’s Finance Minister Shunichi Suzuki told reporters he was watching the recent stock falls with strong interest. The government will continue to collaborate with the BOJ while watching moves in the markets and the economy domestically and abroad, he said.
–With assistance from Ayai Tomisawa, Aya Wagatsuma, Hideyuki Sano, Mari Kiyohara and Julien Ponthus.
(Adds comments from finance minister)
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