Leverage Fuels Japan's Stock Rout as Investors Face Margin Calls

Individual investors are fleeing Japan’s stock market -- or getting kicked out of it.

So say brokers, who attributed the Topix index’s 3 percent decline on Wednesday to part-time traders closing or being forced to close bets they’d made with borrowed money. Losses accelerated in the afternoon, putting stocks briefly on course for their worst two-day drop since the aftermath of the March 2011 earthquake and tsunami. Japan’s giant leveraged exchange-traded fund, the biggest such security worldwide, posted a 15 percent decline over the two days. Volume on the Topix was 55 percent higher than average.

“We haven’t been in a market like this where grown men cry for a while," said Mikey Hsia, a trader at Sunrise Brokers LLP in Hong Kong. “It’s stop-loss sellers, and retail margin positions are probably getting closed out or forced to close."

The Next Funds Nikkei 225 Leveraged Index ETF, which seeks to deliver twice the return of the Nikkei 225, was the most-traded security in Tokyo. Investors who borrowed money to invest in the ETF when inflows peaked last year are now selling, exacerbating the market’s slump, according to Jun Kitazawa, deputy manager of investment information at Miki Securities Co. In Japan, standardized margin contracts must be settled within six months of their purchase.

“Today’s falls in Japanese stocks have been caused by selling related to Nikkei leveraged ETFs," said Kitazawa. Also, “There’s been a lot of margin calls after the rout. With yesterday’s falls the amount of margin calls have shot up today.”

ETF Manager

Nomura Asset Management Co., which manages the ETF, confirmed investors have been getting out.

“We’ve been seeing a lot of redemptions” after investments in the fund reached a recent peak last month, said Kazumasa Hironaka, a spokesman for the asset manager.

The Topix’s decline on Wednesday took it to the lowest close since October 2014. The rout has been exacerbated because many other Asian markets are closed, which means investors are having to sell Japan, said Basil Dan, head of equity sales at Credit Suisse Group AG in Tokyo. According to him, the biggest sellers are probably so-called macro funds, which make investment decisions based on broad views of the entire economy.

Japan’s banks led losses, with Mitsubishi UFJ Financial Group Inc. tumbling 7.1 percent to trade at the lowest valuation on record. The nation’s lenders have been swept up in a global selloff of financial stocks, and also face the prospect of lower profits after the Bank of Japan surprised the world by cutting interest rates to below zero on Jan. 29.

“The major concern in the market is the banks," said Sunrise’s Hsia. “If the banks don’t stabilize, we don’t. There’s been indiscriminate selling in European banks. It’s a very binary situation. I hope we’re close to the end.”

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