Pessimism Fades in Japan Stocks as Market Swings Like Argentina

  • Topix book value sank to lowest level since Abe inauguration
  • ``This isn't the work of human beings,'' Resona's Toda says

After all that pessimism, Japanese stocks saw a bounce of historic proportions.

The Topix index surged 8 percent on Monday, the most since 2008 and the sixth-highest gain on record. It came after the benchmark equity gauge posted its worst weekly loss since the dark days of the financial crisis. Investors see several reasons for the surge: a weaker yen, lower valuations and even speculation of increased central bank stimulus after data showed the economy contracted more than expected.

Whatever the case, the Japanese equity market has become more volatile than China, Greece and even frontier markets such as Argentina. The measure has swung more than 3 percent each day in the past five sessions as volatility in global markets gets funneled through the yen and then reflected back into the nation’s stocks. For CLSA Ltd., the rebound wasn’t surprising, and it’s impossible to tell if the rout has run its course.

“The market was having a panic attack and it’s finally woken up,” said Nicholas Smith, a strategist at CLSA in Tokyo. “They’re looking at valuations and saying this is absolutely ridiculous. The move up is probably a lot to do with short covering,” he said. Still, “no one switches on a light and the market hits higher. You can only judge there’s a good chance of things being higher in six to 12 months.”

For many market watchers, the rebound was overdue as technical signals have been flashing that stocks were oversold for a month. With the Topix down 23 percent for the year through Friday, shares were trading at book value. The last time valuations were that low was the beginning of Shinzo Abe’s administration, when stocks were beginning a rally that would see the index double over the next three years.

Investors are jumping back into riskier assets after global equities tumbled into a bear market last week, weighed down by plunging commodity prices, concerns about slowing economic growth and disillusionment in the ability of central banks to buoy financial markets. Crude soared at the end of last week and struggling bank shares surged in the the U.S. and Europe to lead broader equity markets higher, while data showed U.S. retail sales increased for a third month in January.

In Japan, a surge in the currency -- even after the central bank moved to negative interest rates -- calmed since Friday as the yen slid 1.3 percent against the dollar. That’s good news for the nation’s exporters, with Toyota Motor Corp.’s 9.6 percent advance on Monday providing the biggest boost to a rampant Topix.

Stimulus Bets

A renewed contraction in the economy was also seen as positive for stocks, bringing with it the prospect of even more stimulus by the Bank of Japan. Gross domestic product shrank an annualized 1.4 percent in the last three months of 2015, more than the 0.8 percent decline expected by economists.

Even last week’s pessimism probably helped, as investors sought to cover bearish bets. Short-selling surged to 40.5 percent of trading in Tokyo on Friday.

“Relief,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo, when asked how he feels about the rebound. “I feel relief. At least we were able to get back some of the money for our clients,” he said. “But we don’t know what’s going to happen tomorrow.

Turbulence has been a defining feature for the Tokyo market. The Topix has swung more than 3 percentage points intraday in each of the past five sessions, twice closing with drops of more than 5 percent. Daily volume has been 18 percent higher than a year earlier. The measure swung between gains and losses on Tuesday to trade at 1,295.27 at 9:42 a.m. local time.

Wild Swings

That’s made Japan the world’s wildest market by one yardstick. The 30-day volatility measure for the Topix is at 49, the highest among 70 indexes tracked by Bloomberg, which includes emerging and frontier markets. That surpasses Italy, Argentina and Greece, which are next on the list. Ten-day volatility for the Topix is at the highest level since the March 2011 earthquake.

Leveraged exchange-traded funds, which target a multiple of Japanese share gauges’ returns and accounted for 10 of the 15 most-traded ETFs on Friday, are probably exacerbating the swings.

“I even feel fear in the kind of surge we saw today,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo. “It’s dangerous -- once it starts moving, it doesn’t stop, and when it goes down, it’s limitless too. This isn’t the work of human beings.”

While a one-day surge has few investors convinced volatility has disappeared, some detect a shift in sentiment after the pessimism of the past month.

“Even though the market is still very volatile and anxiety hasn’t melted away, it feels that we’ve entered the rebound stage,” said Kazuhito Suzuki, senior strategist at Shinkin Asset Management. “It’s possible we can eke out even more gains if the rough markets settle down.”

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