Photographer: Andy Rain/Bloomberg

Japan’s Topix Soars Toward Biggest Gain Since 2008

  • Economic contraction report boosts speculation of BOJ stimulus
  • Topix Relative Strength Index signals selloff went too far

Stocks soared in Tokyo, with the Topix posting its biggest gain in more than seven years, as investors judged shares had been oversold and a report showing Japan’s economy shrank more than expected last quarter boosted the outlook for central bank stimulus.

The Topix surged 8 percent to 1,292.23 at the close in Tokyo, its best gain since October 2008, after plunging 13 percent last week. The Nikkei 225 Stock Average jumped 7.2 percent to 16,022.58 as the yen weakened for a second day. U.S. markets rebounded on Friday to halt the longest losing streak since September. Chinese mainland markets reopen Monday after a week long holiday during which global stocks fell into a bear market.

“Japan is massively oversold,” said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. “Everyone is scrambling to get back in. Long-only investors are coming in along with retail and hedge funds. Plus, I would say there’s a lot of short covering going on. Also, U.S. shares rallied and we have China’s market back on today.” 

The Topix’s 14-day relative strength index fell to 26.49 on Friday, below the level of 30 which some traders say indicates that shares will rise.

A report Monday showed Japan’s economy shrank 1.4 percent in the fourth quarter on an annualized basis, more than economists’ forecast for a 0.8 percent contraction.

All of the 33 Topix industry groups rose, led by insurers, tire makers and brokerages. Megabank Mitsubishi UFJ Financial Group Inc., which had fallen 41 percent this year through Friday, jumped 8.7 percent. Toyota Motor Corp., the world’s biggest carmaker, added 9.6 percent as the yen weakened against the dollar. Online retailer Rakuten Inc. tumbled 1.3 percent after reporting full-year profit slumped 37 percent.

Dai-ichi Life Insurance Co. and Japan Post Holdings Co. surged more than 10 percent after both companies posted profit that beat their forecasts. Sumitomo Rubber Industries Ltd. soared 18 percent after targeting a 3.8 percent gain in fiscal year operating profit.

BOJ Speculation

The yen capped its biggest two-week rally since 1998 on Friday, intensifying speculation the Bank of Japan may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus. Finance Minister Taro Aso said Friday the government is watching market movements and will take any action necessary. Following a regular meeting with Abe, BOJ Governor Haruhiko Kuroda said he also would watch market moves closely.

“Japanese policy makers need to go on an all out war against the risk of a recession,” Takuji Okubo, the Tokyo-based principal and chief economist at Japan Macro Advisors, told Bloomberg TV in Tokyo. The Bank of Japan “should keep on easing monetary policy. Prime Minister Shinzo Abe should definitely cancel the sales tax planned for next year. Policy makers need to show the market they are aware of the risks and they are doing everything they can to prevent a recession.”

U.S. Futures

The Standard & Poor’s 500 Index jumped 2 percent on Friday, halting a five-day drop as data showed retail sales increased for a third month in January. E-mini futures on the gauge added 1.1 percent Monday. U.S. market are closed Monday for a holiday.

With mainland markets reopened, China’s central bank has stepped up efforts to restore stability to the nation’s currency and economy, with Governor Zhou Xiaochuan breaking his long silence to say there’s no basis for continued yuan depreciation. The nation’s balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, Zhou said in an interview published Saturday in Caixin magazine.

“Shares have become oversold again and due for at least a bounce which may now be getting under way,” said Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors Ltd., which oversees about $120 billion. “But with global growth worries remaining, it’s still premature to say that shares have bottomed.”

Investors said last week’s declines to below key levels triggered margin calls among retail traders in Japan, who were being automatically forced to close souring bets.

Volume on the Topix was 23 percent above the 30-day average Monday, while 10-day volatility on the gauge surged to its highest level since the March 2011 earthquake. Last week’s rout extended the measure’s drop to 23 percent this year though Friday, with shares trading at 1 times book value.

Investors are “looking at valuations and saying this is absolutely ridiculous,” said Nicholas Smith, a strategist at CLSA Ltd. in Tokyo. “What if multiple sectors are sitting on all-time lows in price to book? And that history is pretty stress tested by a global financial crisis and a once in 200-year quake, and the tech-wreck and so on. The chances are they’re oversold and it’s time for a bounce.”

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