(Bloomberg) -- Turmoil in Japan’s financial markets boiled over Monday as the yen extended its rebound against the dollar to almost 14% from July’s low and stocks tumbled into a bear market. Yields on benchmark Japanese government bonds tumbled 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 cast a shadow over bank earnings, triggering a record 17% decline in the shares of Mitsubishi UFJ Financial Group Inc., the nation’s biggest lender.
The sharp appreciation of the currency, which has gathered pace since the Bank of Japan increased interest rates on July 31, is also rumbling through global markets as it upends countless investment strategies that were built on cheap borrowing in yen.
“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 reflects a snowballing of selling that leads to more selling, according to Takehiko Masuzawa, head of equity trading at Phillip Securities Japan.
All 33 of the industry groups represented in the Topix index have dropped since the Bank of Japan 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.
The risk-off sentiment isn’t all emanating from Japan. The rally in global bonds that’s sent yields spinning lower in large part reflects 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.
The swift downturn in the Japanese stock market likely triggered a massive wave of forced selling among retail investors, deepening the rout.
Retail investors’ margin buying position rose to a 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.”
--With assistance from Ayai Tomisawa, Aya Wagatsuma, Hideyuki Sano and Mari Kiyohara.
(Updates prices)
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