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Tokyo stocks tumbled more than 5 percent on Thursday as nervous investors dumped a broad range of issues following a Wall Street-triggered yen rise.
The 225-issue Nikkei Stock Average ended Thursday down 737.43 points, or 5.15 percent, from Wednesday at 13,589.03, marking its lowest closing level since April 23, while the broader Topix index of all First Section issues on the Tokyo Stock Exchange relinquished 44.45 points, or 3.77 percent, to finish at 1,134.42 at the bell.
Equities across all 33 sectors retreated, notably across real estate, warehouse and consumer finance stocks.
Market players said that following the Nikkei's biggest one-day drop in 13 years on May 23, and continued turbulence thereafter, foreign speculators, hedge funds and institutional investors who had been buying Japanese stocks lost their nerve, relinquished their positions and dumped their Japanese shares to lock in profits.
The U.S. dollar was down 0.5 percent on the day against the yen at 100.68, having hit an intra-day low of 100.46, which was its lowest since May 9, leaving investors little option but to choose the yen as a safe haven, effectively driving the currency back up, and roll out their bets for a strengthening U.S. currency, strategists said.
"The yen is very volatile and as volatility picks up, it will stay that way and that's what we're seeing here," said one local trader.
"The rise in U.S. yields was taking the wind out of equity markets generally as fixed income investments begin to look more attractive," said another Tokyo-based equities manager, adding that investors still remain apprehensive after recent volatile trading in Tokyo, including a single-day loss of more than seven percent last week.
"They (investors) don't see any indication of the downward trend coming to a halt," he concluded.
The temporary adjustment, according to strategists, is down to overly positive expectations from the market for "Abenomics" -- Japanese Prime Minister Shinzo Abe's lofty plans to rescue the nation from its economic doldrums, by reversing the 20-year deflation in just two years, with an inflation target of 2 percent, with a clear roadmap for achieving this not completely laid out yet.
The Bank of Japan (BOJ) last Wednesday opted to continue its bold monetary easing policy in a bid to combat the nation's crippling deflation and hit the government-set inflation target and raised its assessment of the nation's economy for the fifth consecutive month from a previous view that the economic slump had halted and was "showing some signs of picking up."
The BOJ policy board voted unanimously to increase the monetary base at an annual pace of 60 trillion yen (around 585 billion dollars) to 70 trillion yen (around 682 billion dollars), following aggressive monetary easing decisions made in April, aimed at lifting the nation out of its decades-old deflationary quagmire.
The bank said it will boost purchases of government bonds and high-risk assets like exchange-traded funds, to achieve its aims.
Some traders had, hence, expected the central bank's aggressive easing would help put pressure on Japanese bond yields and send Japanese investors in search of higher yields abroad. But this was not to be the case, strategists said.
According to data released by the Finance Ministry earlier Thursday, they sold 1.117 trillion yen (11.1 billion dollars) worth of foreign bonds last week, the second straight week of net- selling, as profit repatriation from overseas was restarted as yields are boosted against other major currencies when the yen has been softened.
The central bank's current assessment has been heavily influenced by the yen's recent slide, with the Japanese currency falling 23 percent against the dollar since mid-November, largely due to market reactions to the "Abenomics".
But political leaders are clearly concerned about the market's volatility and particularly those in the upper echelons of the ruling Liberal Democratic Party will want to allay fears and convince market players that Thursday's plunge was a natural correction and not a deeper issue of falling global faith in Abenomics, as some leading economists have suggested.
Thursday's tumble had Japan's economy minister Akira Amari appealing for calm, saying he hoped "the market would return to a steady tone once the domestic and international situation stabilized."
Chief Cabinet Secretary Yoshihide Suga also highlighted an Organization for Economic Cooperation and Development report which slashed its growth forecast for the world's most advanced economies, except for Japan's.
"It is important to react calmly to movements in the stock market," Suga said.But Suga's comments did little to reinforce some skeptics faith in the nation's fiscal policy -- and its ability to keep its currency and markets stable in the long term.
"It may be the case that the Tokyo Stock Market has been one of the top-performing bourses following Abe's rise to power in December because of hawkish fiscal maneuvering spanning big spending and super-aggressive monetary easing," said one leading economist in Tokyo.
"But global markets are fickle by nature and if speculators, hedge funds and institutional investors feel that global economies and their bourses are shaky, Japan is always the first choice as a safe currency haven, which drives the yen up and pummels exporters, which the nation's economy relies so heavily on -- we've seen this time-and-time again."
"As we are seeing, 'Abenomics' can't keep the market here buoyant indefinitely and following the market's recent volatility, Wall Streets overnight losses and a continued global economic downturn, investors are starting to get jittery, unwind their positions and look for cues elsewhere, meaning that, volatility here is almost certain to continue, as the "Abenomics' phenomenon begins to wear off," the Tokyo-based economist said.
