Japanese real estate stocks plunged on Thursday, leading domestically-focused shares downwards.

The Nikkei 225 finished 1.4 per cent lower at 16,096.21. The Topix fell 1.3 per cent to 1,645.06.

Investors are beginning to worry about the impact of a potential interest rate rise on real estate stocks, which are highly leveraged compared with other sectors. Some analysts have dismissed the concerns, arguing that real estate companies will be able to offset higher prices by raising rents. But the market appears to disagree, and the fall in real estate prices brought the sector’s sub-index back below the level it reached at the end of last year.

The real estate sector as a whole fell 3.7 per cent. Mitsui Fudosan, Japan’s biggest property company, dropped 4.4 per cent to Y2,510. Mitsubishi Estate, its largest rival, fell 3.2 per cent to Y2,455. Sumitomo Realty & Development plunged 6.6 per cent to Y2,820, hit by a a downgrading by Mizuho Securities.

Other domestic sectors also fell, responding to rising expectations in the bond market about an interest rate rise. The consensus among analysts has now shifted to a belief that the bank of Japan will start raising interest rates this year – possibly even this summer.

Toshihiko Fukui, governor of the Bank of Japan, said Thursday: “It is too early to discuss when to end the zero interest rate policy, as we have only just ended our quantitative easing framework.“ The dovish remarks limited the day’s rise in bond yields. However, yields still remained sharply higher than a week ago.

Banking stocks declined 2.3 per cent. Mitsubishi UFJ, the world’s largest bank by assets, was down 2.4 per cent to Y1,650,000. SMFG dropped 3.2 per cent to Y1,220,000. Resona fell 3.1 per cent to Y374,000, continuing to suffer from a recent downgrade by Goldman Sachs.

Retailers fell 1.5 per cent. Seven & I, holding company for the Seven-Eleven Japan convenience stores and Ito-Yokado department stores, slid 3.2 per cent to Y4,280.

Sony, the consumer electronics and entertainment giant, dropped 1.8 per cent to Y5,370 after confirming reports that it would delay the release of its new PlayStation 3 video game console until November.

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