In just one quarter, the developed
world’s biggest stock rally has given way to its worst slump.
Japan’s Topix index, up 51 percent last year, fell 8.9
percent this quarter through March 28, almost twice as much as
the next-worst market, Hong Kong. The retreat is emboldening
short sellers, whose trades made up as much as 36 percent of
daily Tokyo Stock Exchange volume this month. Foreign investors
sold 975 billion yen ($9.5 billion) of Japanese shares in one
week in March, the most since the crash of 1987.
While equities struggled around the world in the first
quarter, declines were worse in Japan, where the euphoria
created by Prime Minister Shinzo Abe and the central bank’s
steps to beat deflation showed signs of wearing off. An
appreciating yen and concern about tomorrow’s sales-tax increase
punished shares more than the rest of the world at a time when
China’s slowdown, Russia’s annexation of Crimea and worry that
the U.S. will raise interest rates sooner than anticipated made
gains harder to come by.
“This situation is unfortunate and saddening,” Hisashi Iwama, a senior portfolio manager who helps oversee 12.7
trillion yen at Diam Co., said by phone on March 26. “I’d
expected stocks to remain level during the first half of this
Developed markets went nowhere in the last three months,
with equities tracked by the 23-country MSCI World Index rising
0.1 percent after posting gains averaging 6.1 percent in five of
the last six quarters. Concern the Federal Reserve’s reduction
of stimulus will curb the global recovery and projections that
China will post its slowest economic growth in 24 years halted
an advance that added $9.6 trillion to worldwide share values in
The Topix rose 3.5 percent last week to pare its loss this
quarter to 8.9 percent. The gauge advanced 0.8 percent today as
of 1:04 p.m. in Tokyo, climbing for a sixth day, while data
showed industrial production unexpectedly fell in February.
Stocks in the MSCI World Index added 0.5 percent last week.
The Standard Poor’s 500 Index (SPX), whose 30 percent gain in 2013
was its biggest in 16 years, lost 0.5 percent the past five days
and has advanced 0.5 percent since December.
“It’s been a period of digestion and a period of
decelerating growth,” Chad Morganlander, a Florham Park, New
Jersey-based fund manager at Stifel Nicolaus Co., which
oversees about $150 billion, said in a March 28 phone interview.
“There’s a market sentiment shift as portfolio managers move
away from investing in the high flyers of 2013. It shouldn’t be
a shock to anyone that the equity markets are flat-lining.’
This time last year, the Topix was posting its second
straight quarterly increase of more than 16 percent as Abe
enacted his revival strategy and the yen plunged. Stocks were
about to receive another boost from the Bank of Japan’s
unprecedented easing program, unveiled a year ago this week. The
Topix ended 2013 at its highest close since July 2008.
Foreign asset managers who rushed into Japan as shares
surged are now heading out. They’ve yanked more than $21 billion
out of the nation’s equities this year, according to the
Ministry of Finance. Almost $155 billion flowed into the market
from overseas last year, the most on record.
Hitachi Zosen Corp. plunged 41 percent to lead declines on
the Nikkei 225 Stock Average (NKY) this year through last week. The
Osaka-based maker of ships and garbage incinerators cut its
full-year net income forecast by 60 percent in February, saying
it expected profitability to decline in its plant and machinery
businesses. Nisshin Steel Holdings Co. fell 29 percent, as did
bearing maker NTN Corp., for the next biggest Nikkei 225 losses.
Overseas investors sold 975 billion yen of Japanese stocks
in the week ended March 14, the most on record after 1.12
trillion yen following the ‘‘Black Monday” stock-market crash
in 1987, data from the Tokyo Stock Exchange show. Investors have
withdrawn $243.1 million in March from U.S. exchange-traded
funds tracking Japan, the first outflow since August, according
to data compiled by Bloomberg.
“Since the start of 2013 the market has essentially been
taken over by large macro hedge funds who basically want big
momentum trades,” said Jonathan Allum, an equity strategist at
SMBC Nikko Capital Markets Ltd. in London, who remains positive
on Japanese shares. “Momentum works in both directions,” he
said. Also, “the sad and basic truth is Japan has become an
adjunct of the currency market.”
The yen has gained 2.4 percent against the dollar this
quarter, the biggest advance since the three months ended June
2012, weighing on the outlook for Japanese exporters. Demand for
the currency as a haven surged and global stocks were buffeted
by Chinese data on exports, manufacturing and credit growth that
missed estimates, signaling the world’s second-biggest economy
may struggle to achieve its 7.5 percent growth target for 2014.
Progress has been slow on Abe’s so-called third-arrow
package of policies to boost growth. Investors are waiting for
lower corporate taxes, looser labor laws and Japan to join the
Trans-Pacific Partnership trade agreement. The premier will
unveil a revised growth strategy in June.
JPMorgan Asset Management Ltd., which oversees $1.5
trillion, is buying more Japanese stocks, figuring Abe will
restore investors’ faith.
“The hope is still there,” Grace Tam, a Hong Kong-based
global market strategist at JPMorgan Asset, said by phone on
March 26. “It’s just hope, rather than us having any evidence
they’re going to enact reforms. If they can’t, people will lose
confidence in Japan, so they better do something.”
Gross domestic product gained 0.7 percent on an annualized
basis in the three months ended in December, a quarter of the
pace initially expected by strategists. The economy is projected
to contract an annualized 3.5 percent in the three months
starting April, according to the median forecast of 28 firms
surveyed by Bloomberg, after Japan raises its sales tax to 8
percent from 5 percent tomorrow.
The last time Japan increased the consumption levy, in
1997, the economy fell into recession. The government has
designed a 5.5 trillion yen stimulus package to counter the
expected decline in consumer spending, and is holding off on a
decision to increase the tax further to 10 percent starting next
“Abe and his cabinet are trying hard to breathe life into
the Japanese economy, but this is easier said than done,” Peter Elston, Singapore-based head of Asia-Pacific strategy and asset
allocation at Aberdeen Asset Management Plc, which oversees
about $320.6 billion. “High expectations that had been built
into the Japanese equity market a year or so ago are not being
met, as evidenced by the poor fourth-quarter GDP data.”
Almost one in five economists surveyed by Bloomberg in
January expected the BOJ to add to stimulus in the first
quarter. In the latest poll, 35 percent say it will come in the
next. The bank buys about 7 trillion yen of bonds a month.
“More investors are nervous about the risk of the sales-tax increase than I had expected,” said Gentoku Kiyokawa,
Tokyo-based director of the investment management department at
BNP Paribas Investment Partners, which oversees the equivalent
of $662 billion. “Plus, I thought the BOJ would move between
January and March, but it didn’t.”
Investors staying the course point to corporate earnings,
equity valuations and the outlook for the currency as signals
the market is poised to rebound. Analysts surveyed by Bloomberg
forecast the yen to weaken to 105 per dollar by June 30 and 110
by the end of the year.
Profits for Topix companies beat expectations last quarter,
led by Toyota Motor Corp., which quadrupled quarterly net
income. Earnings per share for companies on the Topix will
advance 21 percent in the fiscal year ending March 2015,
according to Goldman Sachs.
The Japanese gauge traded at 14.2 times estimated earnings
as of March 28, compared with 15.9 for the SP 500 and 14.4 for
the Stoxx Europe 600 Index, according to data compiled by
Bloomberg. The Topix remains 59 percent below a 1989 high.
“Japan is the only major market globally that is still
enjoying upward earnings revisions,” said Kathy Matsui, chief
equity strategist for Japan at Goldman Sachs Group Inc.
Goldman Sachs, which raised its Topix target six times last
year, cut its three- and six-month forecasts on March 20. It
maintained a 12-month target of 1,450. The Topix closed at
1,186.52 last week.
Tetsuo Seshimo, a portfolio manager at Saison Asset
Management Co., still isn’t convinced.
“The market is likely to keep weakening if policy makers
do nothing,” said Seshimo, whose firm oversees about 82 billion
yen. “Disappointment over Abenomics is getting bigger and
bigger. The talk ultimately didn’t translate into action.”
To contact the reporters on this story:
Yoshiaki Nohara in Tokyo at
Yuko Takeo in Tokyo at
Toshiro Hasegawa in Tokyo at
To contact the editors responsible for this story:
Sarah McDonald at