Here is a round-up of what happened today:
This was a technical “flash crash” correction. There was no domestic reason for the sell-off. There was a spiral of profit taking from retail investors and hedge funds.
Retail investors have been very active in Japan this year and make up around a third of market volume, so their activity has a big impact on share prices.
Hedge funds have been very active in the index futures market and have already made huge absolute profits in Japan. Traded volumes were high today, indicating a big rush to book profits.
The sell-off began when an investor placed large sell orders in index futures after the publication of slightly weaker-than-expected Chinese PMI data in the morning session. The futures order attracted retail attention and sparked a rush of panic selling by retail investors.
For bonds, volatility has been high since the new Governor Kuroda’s early April announcement that the Bank of Japan would double its monetary base, and this is causing some banks to reassess their risk models and stop loss limits. However, we do not see any evidence of significant problems in the JGB market.
So What Do I Do With My Money?
We do not believe that today’s market movements mark a start of a bear market for Japanese equities. This is probably a good buying opportunity for the longer term, but we expect that short-term volatility could persist. In the immediate term, we would not be surprised to see another round of stop-loss selling tomorrow from US investors and ETF liquidations following today’s move. Clients will not be able to get ahead of this selling if it happens, and there is little point in trying.
In our view, Japan remains in a structural bull market. Corporate earnings will be strong as a weaker yen drives higher world market shares and profits. The fundamentals remain very good. Japan has strong profit growth, cheap valuations, a very supportive policy environment, and is a long way off its historical highs. Share prices are the same as they were a couple of weeks ago. We believe Japan is in the early stages of a multi-year bull market.
