Japan’s Annus Volatilitis: Negative Rates, Brexit and Then Trump

  • Yen, bonds swung from epic gains to worst slides since 1990s
  • Stocks saw a negative-rate triggered rout, then a bull market

Grisanti: Is Trump the Force, or Rouge One for Japan?

For investors in Japan’s markets this year, it’s been a case of one shock after the next in a pattern that might have prepared them well for the era of Donald Trump and his reputation for the unexpected.

The yen, Topix and Japanese government bond market -- the largest outside the U.S. -- led reactions to global shocks in 2016, from January’s China-fueled turmoil to the Brexit jolt to Trump’s surprise U.S. presidential-election victory. There were also the domestically manufactured shocks: the Bank of Japan’s adoption of negative interest rates, then shift to yield-curve control.

While risks in 2017 span a China hard landing or another euro-region crisis flare-up to a super-size U.S. economic upsurge, the historic market shifts this year may be hard to repeat.

“Japan’s markets were at the front lines for every episode of turmoil this year,” said Nader Naeimi, who heads a dynamic investment fund in Sydney for $119 billion asset manager AMP Capital. He started adding to Japanese stocks in July, just in time for the turnaround. “The yen’s traditional role as a haven made it a weather vane for global recession worries, and the impact of negative rates on Japan’s banks enhanced the local impact.”

The market reversal has proved a boon to the world’s biggest pension fund -- read about that here.

Japan’s currency, the most-traded outside the dollar and the euro, soared and dived like an emerging market stock index -- going from a world-beating start to the year to an epic collapse. The Topix index of shares went from the worst developed market outside Italy to the best behind Austria.

Bond yields plunged to records: the longest-dated notes came just 4.5 basis points away from delivering zero profit if held to 2056. Currency and stock volatility spiked to rival the 2013 reaction to BOJ Governor Haruhiko Kuroda’s first bazooka, and swings in debt prices reached the highest since the 1990s.

The Japanese currency’s volatility was a marked contrast to last year, when it had a 10-yen range against the dollar that was the narrowest in the era of floating exchange rates. After rising 19 percent in the first three quarters of the year -- second only to the Brazilian real among currencies worldwide -- it has since dropped 14 percent, heading for its worst quarter since 1995.

When the currency was on the rise, the move hammered Japanese stocks, until the yen was a friend thanks to its declines in the final weeks of the year. After falling as much as 23 percent in local currency terms in the first half, the Topix is back in a bull market and heading to eke out a gain for the year.

Meantime, a fear gauge for Japanese stocks -- the Nikkei Stock Average Volatility Index -- reached a five-year high early in the year before dropping back. Yen fluctuations also surged with the BOJ’s policy shifts, as Kuroda adopted negative rates, disappointed hopes for follow-up action, and then overhauled his whole framework away from quantitative easing toward yield-curve targeting. Things calmed down with the November meeting, and Tuesday’s looming decision is also expected to be a yawner.

The unexpected Trump-triggered reflation rally turned frowns into smiles for stock investors, while putting pressure on bonds. Government bond prices climbed about 7 percent in the first half as the negative-rate shock reverberated, before Kuroda’s adoption of yield-curve control and the global sell-off in debt pulled them back. They’re now up about 2 percent for the year.

“All’s well that ends well,” said Tsutomu Yamada, an analyst at Kabu.com Securities Co. in Tokyo. “We’ve finished with stocks rising back up, and all the pains we’ve gone through this year have been worth it. In the end, we’ve ended with a thank-you Trump market.”

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