• Sosei, the biggest stock in the gauge, plunges after earnings
  • Mothers drops 7.8%, resuming declines after Monday’s losses

A measure tracking Japan’s start-up shares plunged by the most in three months, sending volatility soaring, as a selloff in small-caps sparked by disappointing earnings from its biggest member picked up speed.

The Tokyo Stock Exchange Mothers Index tumbled 7.8 percent, the most since Feb. 12, after earlier dropping as much as 9.8 percent. Sosei Group Corp., the biggest weighted company on Mothers, accounted for almost half of the gauge’s 89-point decline as it plummeted 20 percent, its steepest loss in five years. Short-term volatility on the Mothers index rose to its highest since mid-February while the value of shares traded spiked to near an 18-month peak.

The Mothers gauge had risen 36 percent this year through Friday, compared with a 15 percent slide for the Topix Index, which tracks Japan’s biggest shares. Disappointing earnings from Sosei sent the stock down 15 percent on Monday, resulting in a 6.8 percent retreat in the Mothers index. While the gauge climbed 1.3 percent on Tuesday, the relatively small increase failed to alleviate investors’ concerns that the market has risen too high, too quickly, according to Okasan Online Securities Co.

“It’s like a clearance sale is going on,” said Yoshihiro Ito, chief strategist at Okasan in Tokyo. “Sosei earnings bred fear among investors that small-caps are dangerous, and now they’re chucking all their Mothers shares.”

Sosei, which develops and makes medicines for cancer and lung disease, last week posted a 1.43 billion yen ($13 million) loss for the year ended March 31, while its profit forecast for this year fell short of analyst estimates.

Sosei had surged more than sevenfold in the 12 months before it reported earnings on May 13. That pushed the stock to become the biggest weight on the Mothers, accounting for 16 percent of the measure, and prompted criticism the company is distorting the gauge. The Mothers index reached a nine-year high last month.

Other stocks falling on Wednesday included Cyberdyne Inc., with the second-largest weighting in the index, down 4.8 percent. Jig-Saw Inc. slid 21 percent and Brangista Inc. tumbled 18 percent.

“Investors are thinking that if Sosei can fall, then the other shares they hold will plunge, too,” Ito said. “The market was soaring near highs, but Sosei has changed investor sentiment about small-cap shares.”

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