February 4, 2014 7:01 am

Japan sell-off sparked by slowdown fears

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Tokyo stock average surges©EPA

Japanese equities are in the grip of their worst sell-off since June, as weaker than expected US manufacturing data and concerns over a slowdown of the world’s largest economy wiped 4.2 per cent off the Nikkei 225 average.

Dismal sentiment was commonplace throughout Asian bourses on Tuesday.

In Hong Kong, markets failed to gallop into the lunar year of the horse, as the Hang Seng index fell 2.9 per cent, and China-based companies contracted when the exchange reopened after a four-day holiday.

The chill mood that marked the first month of the year are now spilling over into February. More weakness in emerging markets, spooked by the prospect of further capital outflows as the US tapers its ultra-loose monetary policy, is exacerbating the nervous environment.

The contagion spread to South Korea’s Kospi and Australia’s S&P/ASX 200, down 1.7 per cent and 1.8 per cent, respectively. The market jitters were also reflected in the broader Japanese Topix index, which contracted 4.8 per cent to 1,139.27, in spite of a backdrop of solid third-quarter results from corporate Japan.

Among those battered were Mitsubishi Corp, despite the group lifting its full-year profit target and flagging a higher dividend.

But such news was buried under the weight of the sell-off, and a 1.5 per cent surge in the company’s shares was almost instantly washed away.

It capped a torrid start to the year for the world’s second-biggest equity market.

Last year the Nikkei had finished as the world’s best-performing benchmark in constant currencies, up 57 per cent, fired by foreign investors’ enthusiasm over Prime Minister Shinzo Abe’s all-out effort to quash deflation.

This year, amid a general sense of disappointment over weak US economic data and wobbles in emerging markets caused by the gradual withdrawal of stimulus by the US Federal Reserve, it is the world’s worst-performing, down 14 per cent.

The sharp reversal is an “excessive reaction” to the tapering of asset purchases by the Fed, economy minister Akira Amari told reporters on Tuesday. “We need to recognise that business sentiment in Japan is going in an extremely good direction.”

Strategists agree that the sell-off looks disproportionate.

For one thing, much of the selling has been a mechanical response to a stronger yen, says Naoki Kamiyama, chief strategist at Bank of America Merrill Lynch in Tokyo.

The correlation between the level of the Nikkei and the dollar/yen rate is still very high, at 0.41, almost three times the 10-year average, meaning that “Japan has a higher sensitivity to any sort of global issue”, he says.

“The basic stance of the market is that the problem is coming from somewhere else.” While the risk-off mood lingers, “long-term, fundamentals-based institutional investors are not really panicking”.

In addition, some note that the recent bout of emerging market turmoil has been centred on Argentina, South Africa, Turkey and Brazil – all countries to which Japanese companies have generally limited exposure.

Last summer, when fears first mounted over the impact of US tapering on India and Indonesia, the weakness in Japanese stocks was more legitimate, says Satoshi Okagawa, senior global markets analyst at Sumitomo Mitsui Banking Corp in Singapore.

Aside from that, strategists argue, there is no compelling reason to dump Japanese shares.

As at Mitsubishi Corp, third-quarter results have been solid, with companies marginally ahead of pre-tax profit targets compared with three months to go.

The Bank of Japan is still committed to providing further support to asset prices through monetary easing, if the economy sputters after the rise in consumption tax in April.

And Mr Abe’s broader economic reform programme continues. The focus for the 150-day parliamentary session that began on January 24 is the passage of bills deemed essential for economic growth – including a revision of the Companies Act, which could encourage businesses to make more productive use of their record Y70tn in cash reserves.

“Some people say expectations for Abenomics have been fading, but I don’t think so,” says Takashi Hiroki, chief strategist at Monex, one of the largest online brokers in Japan. “In reality, there is not much progress, but there is no sliding back either.”

One indication that domestic investors are recovering some poise is the rally in SoftBank, “a very familiar name to retail investors”, which defied the broad slump on Tuesday to close up 2 per cent.

“It is a sign that the current market is oversold,” he says.

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