(Bloomberg) — Turmoil in Japanese financial markets boiled over Monday as the yen extended its recovery against the dollar to about 13% from its July low and stocks entered a bear market. Japanese government bond yields have fallen the most in more than 20 years.
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The accelerating moves continued to surprise investors, affecting everyone from the big stock and currency traders to the big hedge funds and institutions.
The fall in bond yields, which threatens to hit lenders’ interest income, led to record falls in shares of Japan’s three biggest banks. Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. lost about 12 trillion yen ($85 billion) in market value over the past two trading days.
The currency’s sharp appreciation, which has accelerated since the Bank of Japan raised rates on July 31, is also roiling global markets as it upends numerous investment strategies that relied on cheap borrowing in the yen.
“What a complex situation Japanese policymakers are in: easy monetary policy kills your currency and the slightest hint of tightening breaks your stock market,” said Charu Chanana, head of currency strategy at Saxo Markets. The yen could hit $140 to the dollar sooner rather than later if concerns about the risk of a U.S. recession continue to rise, further weighing on Japanese stocks, she said.
The Nikkei Stock Average Volatility Index soared to an all-time high, based on data collected by Bloomberg starting in 2001. The shock reflects a snowball effect in selling that leads to more selling, said Takehiko Masuzawa, head of equities trading at Phillip Securities Japan.
All 33 industrial groups represented in the Topix index have fallen since the Bank of Japan raised interest rates. After entering a correction on Friday with a decline of more than 10% from the July peak, the gauge has entered a technical bear market, with a decline now around 24%.
“Falling stock prices mean that companies’ operating performance is expected to deteriorate in the future, and if the economy weakens, credit spreads could also come under greater pressure,” said Noritaka Oda, head of debt syndication at SMBC Nikko Securities Inc.
The yield on 10-year Japanese government bonds fell 20.5 basis points to 0.75%, the highest level since 1999, according to data compiled by Bloomberg.
The sense of risk does not only come from Japan. The rally in global bonds that has pushed yields lower largely reflects concerns about the US economic outlook. Concerns are growing that the Federal Reserve is lagging behind in policy support and that global investors are ditching risky assets and seeking refuge in safe havens.
The rapid decline in the Japanese stock market likely caused a huge wave of forced selling among retail investors, further exacerbating the rout.
Retail investors’ margin buying rose to an 18-year high in late July, even as the Nikkei fell from its all-time high.
“We are seeing what appears to be forced selling from private investors. They appear to be damaged,” said Takatoshi Itoshima, strategist at Pictet Asset Management. “While it is possible that we will reach a sales climax in the near term, I am not sure.”
–With help from Ayai Tomisawa, Aya Wagatsuma, Hideyuki Sano and Mari Kiyohara.
(Adds loss of market value at banks)
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