An electronic stock board displayed inside the Kabuto One building in Tokyo, Japan, on Thursday, June 27, 2024.
Bloomberg | Bloomberg | Getty Images
Japan’s Nikkei 225 nosedived almost 5% on Friday, with most Asia-Pacific markets lower after a sell-off on Wall Street overnight.
The Nikkei extended its 2.62% slide on Thursday to lead losses in the region and reach its lowest level since February. The Topix also plunged more than 5%.
Some heavyweight names that are seeing losses include Softbank Group, which tumbled over 7%. Trading houses Mitsui and Marubeni saw losses of over 9% and 7%, respectively.
Japanese government bond yields fell, with the yield on the benchmark 10-year JGB falling below the 1% mark and hitting it lowest level since June 20.
South Korea’s Kospi tumbled 2.6%, while the small-cap Kosdaq plunged 2.56%.
However, K-pop stocks were a bright spot for the market. Shares of three of the four listed K-pop companies defied the broader sell-off to climb on Friday, led by Hybe after the firm announced its new business strategy on Thursday after market hours.
Australia’s S&P/ASX 200 was down 2.02% , retreating from its all-time high achieved on Thursday.
Hong Kong’s Hang Seng index futures were at 17,047, lower than the HSI’s last close of 17,304.96.
Separately, South Korea’s inflation numbers for July came in slightly higher than expected, with the country’s consumer price index climbing 2.6% year on year, compared to the 2.5% expected by economists polled by Reuters.
The gloomy sentiment in Asia markets comes after a sell-off on Wall Street in Thursday’s trading session, which saw all three major U.S. indexes plunge on recession fears.
The Russell 2000 index, the small-cap benchmark that has rallied lately, dropped 3%.
In the U.S., fresh data stoked fears over a possible recession and apprehensions that the Federal Reserve could be too late in cutting interest rates.
Initial jobless claims rose the most since August 2023. The ISM manufacturing index, a barometer of factory activity in the U.S., came in at 46.8%, worse than expected and signaling economic contraction.
After these data, the 10-year Treasury yield dropped below 4% for the first time since February.
—CNBC’s Pia Singh and Samantha Subin contributed to this report.
Attractive returns and the breadth of opportunities are among the many reasons the U.S. has long reigned supreme for investors. However, according to one strategist, a different market has much better valuations right now. “The U.S. is relatively expensive. In terms of countries, Japan looks to offer the best combination of earnings growth, cheap valuations and policy support,” Tom Stevenson, investment director at Fidelity International, told CNBC Pro. “Japanese shares are trading on around 15 times this year’s expected earnings and 14 times earnings two years out,” he said. “There has been some increase in this multiple during the recent rally in Japanese shares, but they remain relatively cheap compared to the U.S. which trades on around 20 times earnings.” Japan’s Nikkei 225 Index is up over 18% year to date, while the U.S.’ S & P 500 Index is around 11% higher. Against this backdrop, Daniel Hurley, portfolio specialist for emerging markets and Japanese equities strategy at T. Rowe Price (TRP), is also looking at the country favorably. “With the supportive backdrop for Japan set to continue, including currency dynamics, global growth and corporate governance reform, the outlook for Japan equities are positive and valuations [are] not stretched,” he told CNBC Pro. Japan is seemingly on course for its strongest economic growth since the early 1990s. Inflation levels in the country have been improving after years of deflationary pressures, while earnings revisions are positive, Stevenson said. The stronger performance of Japanese equities follows the restructuring rules unveiled by the Tokyo Exchange Group earlier this year. Among the latest measures was one directing companies to “comply or explain” if they are trading below a price-to-book ratio of one — a measure that is indicative of whether a company is using its capital efficiently. The exchange also warned that companies that fail to comply could face the prospect of delisting as soon as 2026. Stock picks As investors weigh putting their money into Japan — especially given the weak yen vs. the dollar — TRP’s Hurley and Fidelity’s Stevenson both believe there are some investment gems to be found. Exporters in particular stand to gain given that they account for some 50% of the revenues registered by Japan’s Topix Index, notes Hurley. “A weak currency makes them very competitive and boosts their earnings,” he said. “Since the Federal Reserve [is] remaining hawkish and Bank of Japan dovish, the interest rate differential is set to persist,” he added. The yield on Japan’s 10-year government bond is currently around 0.8%, while the U.S.’ equivalent is around 4.86%. “As a result, the weak yen, while not necessarily depreciating further, should continue to remain supportive for exporters,” he added. Many of these exporters are large-cap companies in the automotive and industrial sectors. Hurley’s top picks include industrial equipment supplier Keyence , telecommunications player Sony , financial services group Orix , and cancer therapeutics developer Astella Pharmaceuticals . Meanwhile, Fidelity’s Stevenson has a liking for funds with exposure to Japan. Among his choices is the Baillie Gifford Japanese Fund, which he describes as a “growth-focused fund run by an experienced manager.” He also likes the Schroder Japan Trust, as it “allows the manager to invest in more illiquid investments like smaller companies.” The Baillie Gifford Japanese Fund’s top holdings include internet services company SoftBank Group (5.5%), financial services firm SBI Holdings (3.7%) and technology conglomerate Rakuten (3.5%), according to its fund factsheet. Meanwhile, the Schroder Japan Trust has holdings across several industries, including names such as electronics company Hitachi , Nippon Gas and Toyota Motor . Elsewhere, Stevenson also suggests that investors look at the iShares Core MSCI Japan IMI ETF , “a tracker fund run by an experienced passive manager with low costs.”
A pedestrian walks past the Bank of Japan (BoJ) building in central Tokyo on July 28, 2023.
Richard A. Brooks | Afp | Getty Images
The Bank of Japan announced it’s increasing its bond purchases at Wednesday’s auction, as a spike in government bond yields tests its resolve to defend its yield curve control policy.
In a statement Monday, the Japanese central bank said it will conduct an unspecific amount of additional purchases of Japanese government bonds with tenures of more than five years and up to 10 years. This adds to the BOJ’s reported 300 billion yen Friday bond purchase with similar maturities.
Yields on 10-year Japanese government bonds hit as much as 0.775% Monday, its highest since September 2013 and nearing the BOJ’s hard 1% cap. The Japanese yen shed nearly 0.3% to about 149.73 yen against the dollar, nearing the 150 yen level that prompted BOJ intervention last year.
Hawkish comments in the minutes of a lively BOJ September policy meeting released earlier Monday reignited expectations the BOJ is slowly laying the groundwork for the end to negative interest rates.
At its policy meeting in July, the BOJ loosened its yield curve control to allow longer term rates to move more in tandem with rising inflation in Governor Kazuo Ueda’s first policy change since assuming office in April.
The move to broaden the permissible range for 10-year JGB yields from plus and minus 0.5 percentage point around its 0% target to 1 percentage point was seen as the start of a gradual departure from the yield curve control policy enacted by Ueda’s predecessor.
The yield curve control, known also as the YCC, is a policy tool where the central bank targets an interest rate, and then buys and sells bonds as necessary to achieve that target. It’s part of the BOJ’s ultra-loose monetary policy, which also includes keeping short-term interest rates at -0.1% in its attempts to combat decades of deflation in the world’s third-largest economy.
On Monday, a comment by an unnamed policymaker in the September BOJ meeting minutes that “the achievement of 2 percent inflation in a sustainable and stable manner seems to have clearly come in sight” partly added to the yield spike.
At the September meeting though, the BOJ eventually decided to maintain its ultra-loose policy and left rates unchanged on Friday, mindful of the “extremely high uncertainties” on the growth outlook domestically and globally.
Despite core inflation exceeding the central bank’s stated 2% target for 17 consecutive months, BOJ officials have been cautious about exiting its radical stimulus.
This is due to what the BOJ sees as a lack of sustainable inflation, deriving from meaningful wage growth that it believes would lead to a positive chain effect supporting household consumption and economic growth.
Still, the Bank of Japan could be forced into hiking rates sooner than expected if the Japanese yen weakens beyond 150 against the dollar, according to Bob Michele, global head of fixed income at JPMorgan Asset Management.
Higher rates could then unwind the yen carry trade and spark a return of Japanese capital to its domestic bond markets, a move that could trigger market volatility, he told CNBC last Thursday.
The Japanese yen strengthened and 10-year JGB yield rose after the Bank of Japan said it would allow “greater flexibility” in its target range for 10-year Japanese government bond yields.
Yields for 10-year Japanese government bonds stood at 0.551% on the news, the level since September 2014. The yen was trading at 138.64 against the dollar at 12:35p.m. Hong Kong and Singapore time.
After a two day policy meeting, Japan’s central bank adjusted its stance on its yield curve control policy, saying that it will continue to allow 10-year government bond yields to fluctuate in the range of around plus and minus 0.5%.
The BOJ also offered to buy 10-year JGBs at 1% every business day through fixed-rate operations, unless no bids are submitted. The move effectively expands its tolerance by another 50 basis points.
Earlier, currency markets were testing the waters after Nikkei reported the BOJ will let long-term interest rates rise beyond its cap of 0.5% “by a certain degree” at its monetary policy meeting today.
Under its yield curve control policy, the central bank targets short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero.
With inflation having exceeded the BOJ’s 2% target, concerns are rising that Japan’s relatively low interest rates have made the yen less attractive and vulnerable to selling.
Central banks around the world have raised rates aggressively to rein in on inflation, but Japan has continued to maintain an ultra-loose monetary policy and kept rates low.
On Friday, the Tokyo’s core consumer price index, which excludes volatile fresh food but includes fuel costs, rose 3.0% in July from a year ago. That’s slightly more than the 2.9% expected in a Reuters consensus poll.
The central bank caught markets off guard by tweaking its yield curve control (YCC) policy to allow the yield on the 10-year Japanese government bond (JGB) to move 50 basis points either side of its 0% target, up from 25 basis points previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.
In a policy statement, the BOJ said the move was intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”
The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation toward its 2% target after a prolonged period of economic stagnation and ultralow inflation.
The BOJ — an outlier compared with most major central banks — also left its benchmark interest rate unchanged at -0.1% on Tuesday and vowed to significantly increase the rate of its 10-year government bond purchases, retaining its ultra-loose monetary policy stance. In contrast, other central banks around the world are continuing to hike rates and tighten monetary policy aggressively in an effort to rein in sky-high inflation.
The YCC change prompted the yen and bond yields around the world to rise, while stocks in Asia-Pacific tanked. Japan’s Nikkei 225 closed down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed to more than 0.43%, its highest level since 2015.
By midafternoon in Europe, the U.S. dollar was down 3.3% against the surging yen. The yen’s rally saw the currency notch the biggest single-day gain against the U.S. dollar since March 1995 (27 years, eight months, 20 days), according to FactSet currency data.
U.S. Treasury yields spiked, with the 10-year note climbing by around 7 basis points to just below 3.66% and the 30-year bond rising by more than 8 basis points to 3.7078%. Yields move inversely to prices.
Shares in Europe retreated initially, with the pan-European Stoxx 600 shedding 1% in early trade before recovering most of its losses by late morning. European government bonds also sold off, with Germany’s 10-year bund yield up almost 7 basis points to trade at 2.2640%, having slipped from its earlier highs.
“The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy to try and prod demand and wake up prices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“But the Bank is still staying firmly plugged into its bond purchase program, claiming this is just fine tuning, not the start of a reversal of policy.”
That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that the market moves reflect a sudden flurry of bets on a hawkish policy pivot from the BOJ, but argued that the “popular bet does not mean that is the policy reality, or the intended policy perception.”
“Fact is, there is nothing in the fundamental nature of the move or the accompanying communique that challenges our fundamental view that the BoJ will calibrate policy to relieve JPY pressures, but not turn overtly hawkish,” said Vishnu Varathan, head of economics and strategy for the Asia and Oceania Treasury Department at Mizuho.
“For one, there was every effort made to emphasize that policy accommodation is being maintained, whether this was in reference to intended as well as potential step-up in bond purchases or suggesting no further YCC target band expansion (for now).”
The Bank of Japan noted in its statement that since early spring, market volatility around the world had risen, “and this has significantly affected these markets in Japan.”
“The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” it added.
The central bank said if these market conditions persisted, it could have a “negative impact on financial conditions such as issuance conditions for corporate bonds.”
Luis Costa, head of CEEMEA strategy at Citi, indicated on Tuesday that the market move may be an overreaction, telling CNBC there was “absolutely nothing stunning” about the BOJ’s decision.
“You have to take this BOJ measure in the context of a positioning in dollar-yen that was obviously not expecting this tweak. It’s a tweak,” he said.
Japanese inflation is projected to come in at 3.7% annually in November, according to a Reuters poll last week — a 40-year high, but still well below the levels seen in comparable Western economies.
Costa said the Bank of Japan’s move was not geared toward combating inflation but addressing the “infrastructure and the dynamics of JGB trading” and the gap in volatility between the trade in JGBs and the rest of the market.
The Japanese yen weakened past 150 against the U.S. dollar Thursday, hitting a key psychological level that hasn’t been seen since August 1990.
The Bank of Japan’s two-day meeting is slated for next week. Policymakers have ruled out a rate hike in order to defend against further weakening of the currency.
On Thursday, Japan’s 10-year government debt yields breached the 0.25% ceiling that the central bank vowed to defend – last standing at 0.252%. The yield on the 20-year bond also rose to its highest since September 2015.
The Bank of Japan also announced emergency bond-buying operations Thursday. It offered to buy 100 billion yen ($666.98 million) worth of Japanese government bonds with maturities of 10-20 years and another tranche worth 100 billion yen with maturities of 5-10 years.
The central bank has repeatedly vowed to buy an unlimited amount of bonds at a fixed rate in order to cap 10-year government debt yields at 0.25% as part of its stimulus measures for the economy.
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On Thursday, Reuters reported Japanese Finance Minister Shunichi Suzuki said the government will take “appropriate steps against excess volatility.”
“Recent rapid and one-sided yen declines are undesirable. We absolutely cannot tolerate excessively volatile moves driven by speculative trading,” he said.
When asked how concerning is USD/JPY reaching levels around 150, ANZ chief economist Richard Yetsenga said he’s “not that worried.”
“I don’t think we’re into destabilizing currency territory yet,” he said on CNBC’s “Squawk Box Asia.”
“There’s lots of emotive words around it, but what problems has it engendered?” he said.
Shortly after the Bank of Japan’s latest decision to maintain low interest rates to support the country’s sluggish economy last month, officials confirmed they intervened to support the currency against further weakening.
That intervention briefly pushed the yen to 142 against the dollar. The spread between the highest and lowest points intraday was also at its widest since 2016.
In April 1990, the yen traded around 159.8 against the dollar and last breached 160 in December 1986.
