Was that it for “Abenomics”? Thursday’s 7.3 per cent fall in Japan’s Nikkei 225 stock average was the steepest since the aftermath of the March 2011 earthquake, marking the first big setback for the bull market ignited by Prime Minister Shinzo Abe’s drive to reflate the world’s third-largest economy.

The selling, apparently triggered by a mid-morning release of weak Chinese manufacturing data, seemed indiscriminate. Just 21 of 1,691 companies listed on the first section of the Tokyo Stock Exchange rose or finished flat, amid record daily turnover of Y5.8tn ($57bn).

One equity salesman at SMBC Nikko Securities in London noted something ominous: the very worst performer, down almost a quarter, was a stock by the name of “Accretive”.

“Today’s nose-dive was a wake-up call for Abenomics dreamers,” says Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo, who has long claimed that Mr Abe’s campaign to push investors into riskier assets is doomed to failure.

The Tokyo market’s plunge, which followed initial gains for stocks, came against a backdrop of concern over the prospect of reduced central bank support for the global economy. Federal Reserve chairman Ben Bernanke’s comments on Wednesday that monetary stimulus could be scaled back had led to late falls on Wall Street.

“I don’t remember a day like it,” says Naoki Kamiyama, chief equity strategist at Bank of America Merrill Lynch in Tokyo.

Yet most analysts appear inclined to keep a little faith despite the sell-off. They note that Thursday’s move, although violent, merely takes the Nikkei back to where it was nine trading days ago.

The record turnover – more than double the daily average value so far this year – was some consolation in itself, says Mr Kamiyama. High liquidity is good news “because it means a disagreement – someone is selling and someone is buying”, he says.

Analysts also note that technical indicators had been flashing red, suggesting that the market was close to turning.

The so-called “Toraku ratio”, for example, which divides the number of first-section gainers by the number of losers over the previous 25 days, had implied a significant fall was imminent for most of the past eight weeks.

Over the past six months the Nikkei had risen almost without interruption, its 55 per cent return beating all but two of 94 global equity benchmarks.

“We’ve just had a very steep rally with no corrections, so it’s only natural to have a big rebound,” says Takashi Hiroki, chief strategist at Monex, one of the largest online brokers in Japan.

One reason for optimism, say analysts, is that the wave of selling on Thursday appeared to be led by individual investors, rather than the foreign institutions which had driven the big move upwards, pouring a net $80bn into Japanese stocks since the turn of the year.

Day traders have become an increasingly active presence in the market, many of them taking advantage of a recent relaxation of rules on trading on margin. Last week individuals’ share of total trading rose to an all-time high of 35 per cent, about double the levels of September, when the rules were changed.

Kabu.com, another leading online broker, saw Y287bn of trades – 10 times the level of the same day a year earlier – as individual investors scrambled to offload. Institutions, by contrast, were reacting, rather than acting.

“I doubt if any of the institutional sell-side brokers were seeing much panic-selling,” says Stefan Worrall, director of equity sales at Credit Suisse in Tokyo.

Analysts say the fact that some stable blue-chips such as KDDI got off relatively lightly means that the basic proposition of the past few months – buy Japanese stocks on the prospect of a revival in earnings – is still intact.

“I don’t think this bull market ended today, but people are beginning to find the gaps between the macro and the micro,” says Yohei Osade, pan-Asian head of equity at Mizuho Securities.

However, many analysts expect the market to remain fragile in the short term, as investors of all descriptions take stock of the rally since mid-November, when the previous government called an election. Only in four of 27 weeks since then has the market failed to rise.

Institutions are likely to take a more critical approach from here, say analysts, perhaps seeking out companies that stand to benefit from reforms under Mr Abe’s “third arrow” – measures to boost Japan’s competitiveness, complementing the opening salvos of fiscal and monetary stimulus – rather than simply buying exporters benefiting from a weaker yen.

“The boost to the Nikkei from a weaker yen has probably run its course,” wrote Julian Jessop, chief global economist at Capital Economics, a London-based research boutique, in a note to clients on Thursday. “[Thursday’s] slump is not necessarily the end of the bull market in Japanese equities, but the next few months will be much harder going.”

Meanwhile, big global funds still underweight Japan compared to their targets may wait for calmer markets to dip in again.

“Investors hate excess volatility,” says Hiroki Tsujimura, chief investment officer at Nikko Asset Management in Japan. “Once volatility steps up, they step down, take a rest and see what’s happening.”

Even if the turn becomes a correction – normally defined as a 10 per cent drop – most seem convinced that the world’s new-found interest in Japan will persist, as Mr Abe’s big experiment plays out.

“Are we going to trade lower? I think we are,” says Paul Krake, founder of View from the Park, a Hong Kong-based consultancy. “But I’m sticking to my guns. We’re seeing structural, generational changes in Japan.”

Additional reporting by Josh Noble and Nobuko Juji

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