Japan Shares Rebound After Brexit Spurs Biggest Rout Since 2011

  • Defensives rise, with papermakers leading gains on Topix
  • Exporter stocks continue to slide as yen resumes advance

Japanese shares rebounded from their worst drop since the aftermath of the 2011 earthquake, led by defensive stocks, as Prime Minister Shinzo Abe issued instructions to calm markets following the U.K.’s shock decision to leave the European Union.

The Topix index added 1.8 percent to 1,225.76 at the close in Tokyo, with papermakers, railway companies and drugmakers posting the largest advances. The gauge plunged 7.3 percent on Friday, its biggest single-day drop since it tumbled 9.5 percent on March 15, 2011. The British pound resumed its decline after the Japanese currency posted its biggest gain on Friday since the depths of the Asian financial crisis.

“We’re seeing a correction of overdone selling in the Japanese market,” said Seiki Orimi, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “The fact that the Japanese government is showing a fighting stance will be positive psychologically.”

Abe asked for various measures to stabilize markets, Finance Minister Taro Aso told reporters in Tokyo after a meeting with the prime minister, Bank of Japan Deputy Governor Hiroshi Nakaso, Chief Cabinet Secretary Yoshihide Suga and others. Abe ordered the BOJ to provide funds to support the financial system, and gave instructions to ensure liquidity, Nakaso said.

Policy Expectation

What little consolation investors may have for now is the growing chance of policy action by central banks globally to ease the market turmoil and pump liquidity into financial markets. Odds that the Federal Reserve will raise interest rates by the end of this year fell to 15 percent, down from a 34 percent chance before the Brexit vote.

“There’s some expectation for policy cooperation,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Center in the city. “But until we actually see this materializing, it’s difficult for the market to gain strength.”

The Brexit vote has added to the woes of the Topix, which was already one of the world’s worst performing benchmark indexes this year. The Japanese measure is down 21 percent in 2016 with the yen up the most among its major peers, cutting the profit outlook for the nation’s exporters.

The Japanese Economy Ministry met with companies that have operations in the U.K. on Monday. The companies urged the government to provide more details on Brexit, a ministry official said.

The yen gained against the dollar, trading at 101.87, after China weakened its currency fixing by the most since after August’s devaluation. The Japanese currency had surged to as strong as 99.02 a dollar on Friday. Every one yen gain against the dollar will reduce carmakers’ operating profits by 84.9 billion yen ($834 million), according to Nomura Holdings Inc. The cost of Brexit for the sector may be 920 billion yen, the brokerage said.

Toyota Motor Corp. slid 1.7 percent after plunging 8.7 percent on Friday. Mazda Motor Corp. plunged 9.7 percent after Nomura cut its rating on the automaker, citing a slowdown in the European car market and a stronger yen. Nippon Sheet Glass Co., which counts Europe as its largest market, dropped 8.6 percent, taking its two-day decline to 26 percent.

Defensive Rally

Meanwhile, so-called defensive shares led gains on the Topix, with papermakers, railway stocks and drugmakers rising the most among the gauge’s 33 industry groups. Japan Tobacco Inc. added 5 percent, while Astellas Pharma Inc. jumped 6.6 percent. The Tokyo Stock Exchange Mothers Index also saw a 4.7 percent rebound after Friday’s 8.5 percent plunge. Drugmaker Sosei Group Corp., which has the largest weighting on the gauge, rose 5.4 percent.

The Nikkei 225 Stock Average gained 2.4 percent to 15,309.21. Futures on the S&P 500 Index were little changed. The underlying U.S. equity gauge plunged 3.8 percent on Friday, the most in 10 months, joining a selloff in global risk assets on concern the U.K. decision to leave the EU will hamper worldwide growth. Futures on the FTSE 100 index dropped 1.5 percent.

“We’ve regained some calm,” said Masaaki Yamaguchi, a Tokyo-based equity market strategist at Nomura. “The fact that the Japanese market has started higher will be a source of comfort for global market participants.”

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