Japanese equities have taken a dive, with the Nikkei 225 closing 7.3 per cent down and the Topix shedding 6.9 per cent.
The downward move was prompted by speculation that the US Federal Reserve could start to slow the pace of its $85bn bond-buying programme and data showing a surprise fall in Chinese manufacturing activity.
However, some commentators have pointed to the recent rise in Japanese government bond yields as an important factor in declining equity sentiment. JGBs have seen a sharp sell off since the Bank of Japan unveiled massive monetary stimulus last month, with yields hitting their highest points since April 2012.
Asset allocators have highlighted the rise in yields as one of the key factors behind the recent stockmarket fall, although it remains to be seen if this is the start of a lasting correction.
ING IM head of strategy Valentijn van Nieuwenhuijzen
“It has been an impressive move indeed. The trigger was clearly the weaker-than-expected Chinese PMI, but the market reaction cannot be fully explained by that alone. In the background, the recent rise in Japanese bond yields and some increased doubts about the Fed’s QE programme seem to have played a role. Finally, there are clearly important technical factors at play as many investors seem to have started taking profit on the market that has performed the strongest in the year-to-date, the Japanese equity market.”
Fidelity Worldwide Investment director of asset allocation Trevor Greetham
“The rise in Japanese government bond yields is starting to undermine equity sentiment and especially J-REITs which have been selling off for the last month. Market volatility in Japan is such that it remains to be seen if this will be a lasting correction or just a natural pull back after many days of strong rises.
“The danger I see from JGB market volatility is that a rise in yields could:
- hurt confidence via stock prices
- reduce support for the administration in July’s elections and so threaten the structural reform programme
- lead some to argue wrongly that fiscal easing should be abandoned
- lead others to call for a firmer commitment to monetary tightening if inflation overshoots and that could limit the stimulus effect of easy money
“[Qualitative and quantitative ease] will become ineffective if the market worries prematurely about tightening. The most sure means of keeping the long end of the bond market under control is to keep the short and medium end under control as the Fed has done – via rational expectations of future policy action rather than by intervention.”
Artemis Global Select fund manager Simon Edelsten
“Some question whether the Bank of Japan will succeed in keeping JGB yields low, citing the move up in 10 year yields from 0.4 per cent to nearly 1 per cent last night. Firstly this misses the move down to 0.4 per cent between the election of Abe-San last December – yields went down and then went up again. While government debt funding is where it was, tax revenues are now higher as sales taxes have risen.
“Secondly, the BoJ again intervened during the session to pull yields back to close at 0.85 per cent. If the bond shorts wish to argue with Kuroda-San, they have that option, but he can print yen until they lose. The smarter trade seems to be to remain short yen and to back the best quality exporters. That is our portfolio.”
Bestinvest managing director of business development and communications Jason Hollands
“As a market which has been attracting considerable attention from international investors recently on the back of the radical reforms dubbed Abenomics, and which has posted exceptional returns over the last six months, it is perhaps unsurprising that having risen the most, Japanese equities would take the biggest hit on the latest jitters. We still think it is one of the most interesting stories in town, particularly once reforms of the corporate sector get underway.
“A short term correction at some point was always likely. For long-term investors is not unhealthy and not a cause for panic. Indeed any sustained correction would provide an attractive entry point into equity markets.”