As most of Japan prepares to take time off for the Golden Week holidays in May, stock traders may be downgrading their vacation plans. Tokyo's benchmark Nikkei 225 index shed nearly 500 points, or 2.8%, Monday -- despite record earnings expected from many Japanese companies in coming weeks. By closing time, the Nikkei had fallen to 16,914.40, its lowest level since Mar. 29. Of the 1,694 companies trading on the Tokyo Stock Exchange, 1,598 lost ground, while just 98 closed up or unchanged.
The expected good news from home was outweighed by global concerns. A big worry was the weaker dollar, which fell to 115.35 yen, from more than 117 on Friday. A rising yen would take a bite out of the export profits of Japan's export-dependent auto makers and high tech companies. Toyota Motor (TM) was the most heavily traded issue and closed down 2.8%. Blue chip electronics makers Canon (CAJ), Hitachi (HIT), NEC (NIPNY), Sharp (SHCAY), Sony (SNE), and Toshiba (TOSBF) also traded down. "The biggest influence is the yen," says Seiichiro Iwasawa, a strategist at Nomura Securities in Tokyo.
Another key worry: the rising price of oil, which topped $75 in New York trading Friday. Japan has few natural resources of its own, and is almost entirely dependent on imported oil. Although oil prices haven't yet hurt its economic resurgence, corporate Japan will start to worry if oil keeps climbing. "Continuous high [oil prices] will bring in cost pressures on the global economy," Hiroshi Okuda, chief of Keidanren, Japan's big business lobby, and former president of Toyota, noted last Tuesday.
While a falling dollar and rising oil prices are global concerns, few traders expected other markets worldwide to follow Tokyo down. Indeed, shares fell only marginally in London, Frankfurt, and Paris on Monday, while Hong Kong's Hang Seng index dropped by 1.2%.
In Tokyo, domestic issues also weighed on stocks. Despite the bullish expectations for the fiscal year ended in March, cautious corporate estimates for the year ahead are causing concern. "Many companies' projections are lower than the analyst consensus forecasts," says Nomura's Iwasawa. "Companies tend to be very conservative."
Iwasawa cites household chemical goods maker Kao (KCRPY) and electrical machinery maker Fanuc, both of which posted disappointing projections on Monday. And on Friday, precision electronics maker Hoya (HOCPY) saw its stock slide by 2% even though it announced on Thursday that net profits rose 18%, to $655 million. Analysts said Hoya's results were slightly worse than expected and cited future concerns. On Monday, Hoya's stock declined another 2.3%.
Political uncertainties didn't help trading either. On Sunday, Japan's ruling Liberal Democratic Party surprised people by losing a by-election in Chiba prefecture to the opposition Democratic Party of Japan. That led to speculation among brokers that the LDP's commitment to reform could weaken once Prime Minister Junichiro Koizumi steps down in September.
The losses, meanwhile, were hardly disastrous. The Nikkei, after all, is up 7.4% this year even after Monday's dip. But the sell-off was the biggest since Jan. 18, when prosecutors raided the offices of Internet company Livedoor and accused its CEO of breaking securities laws.