Why Japan’s 10-Day Break Has Markets Worried
(Bloomberg) -- Japan’s extended spring vacation, when a series of national holidays bunch up, is known as “Golden Week.” This year adds the May 1 accession of the new emperor, Crown Prince Naruhito, to the mix. The result: a 10-day stretch that wipes out six trading sessions -- the longest market closure since the end of World War II. What might sound like a nice, relaxing break actually has traders and regulators alike fretting about the potential for cash shortages, market volatility or even the kind of “flash crash” that happened during Japan’s last New Year holiday. That was only four days long.
1. What is Golden Week?
Japan is among the most generous countries when it comes to national holidays. Golden Week traditionally consists of four in late April-early May: Showa Day, Constitution Day, Greenery Day and Children’s Day. In the middle this year comes the emperor’s accession, with the day before, of, and after the succession designated as holidays too. Combined with weekends, Golden Week 2019 stretches from April 27 through May 6. Typically, people spend the time vacationing abroad or visiting their families. Many stores close.
2. So what’s the problem?
While Japan grinds to a halt, there will be major events and economic data released elsewhere, including a U.S. Federal Reserve rate decision on May 1. Traders and investors won’t be able to exit their positions in Tokyo once the market shutdown starts, but it’ll be business as usual in the rest of the world. Japan’s Financial Services Agency urged currency traders to “manage their positions” before the holidays and said it will be monitoring for signs of market manipulation in the run-up, when trading volumes, or liquidity, are expected to be low. It warned of the prospect for post-holiday volatility. And the agency is encouraging people to withdraw extra cash or raise the withdrawal limits on their ATM cards so they don’t run short, since bank branches are expected to close.
3. Has there been trouble before?
The currency market’s so-called witching hour -- between the close in New York and the open in Tokyo -- has become notorious in recent years for rapid swings due to thin liquidity, a problem that’s exacerbated by extended holidays. Memories are still fresh of the Jan. 3 flash crash, when Japan was shut for the last day of its New Year break. Orders to dump the Australian dollar and the Turkish lira against the yen flooded the markets. Algorithmic trading kicked in and the yen surged in seven minutes through levels that had held for almost a decade. A month later the Swiss franc swooned almost 1 percent before recovering, within minutes, at the start of Asian trading during another Japanese holiday.
4. How are financial institutions preparing?
Some brokerages such as Daiwa Securities Group Inc. are planning to make trading in U.S.- and European-listed stocks available for Japanese clients during the holidays (on April 30 and May 2). Dai-ichi Life Insurance Co. says it extended the maturities of some hedge positions to cover the holiday period and is considering tweaking work schedules. Fukoku Mutual Life Insurance Co. is going to stop buying stocks before the holidays and has prepared a manual for staff to deal with the unexpected. Others are relying on technology: Nippon Life Insurance Co. has a web-conference system in place, and Meiji Yasuda Life Insurance Co. says its staff has the “required devices” to trade or deal with any market swings. Meanwhile, investors have been clamoring for the security of 10-year Japanese government bonds ahead of the 10-day holiday. The April 2 auction drew the highest bid-to-cover ratio in 14 years.
5. Any other impact?
JPMorgan says retail food sales and consumer durables may take a hit if people are traveling and putting their money into the service sector. As usual, some companies including Toyota Motor Corp. are halting operations; others such as JFE Holdings Inc. and Sumitomo Metal Mining Co. Ltd. say they will continue to operate their plants. The extra days off may reduce power demand in some regions, which could lead to lower prices, according to BloombergNEF analyst Miho Kurosaki. In contrast to all the preparations in Japan, overseas investors seem less concerned. “We aren’t very much impacted,” said Dhiraj Bajaj, portfolio manager for Lombard Odier in Singapore.
6. What will the accession be like?
Hard to say. According to a schedule from the Imperial Household Agency, there are two events planned for May 1, both on the Imperial Palace Grounds and closed to the public. It isn’t clear whether any of the ceremony will be open to domestic media, let alone foreign reporters. On Saturday May 4, the Palace will be opened to all, allowing people to see and congratulate the new emperor, whose era has been named Reiwa, or roughly “auspicious calm.” The actual Enthronement Ceremony will take place on Oct. 22.
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