Japanese Stocks Slump as Hawkish Fed Damps Cyclical Appeal

Japanese stocks declined by the most in almost four months, extending losses from late last week as hawkish comments from the U.S. Federal Reserve crushed the reflation trade that had driven the market earlier this year.

The selloff briefly sent the Nikkei 225 Stock Average down as much as 4%, the most since April 2020, amid a global selloff on concerns of less accommodative U.S. monetary policy. With large percentages of economically sensitive shares, Japan has been particularly hard hit.

Japanese Stocks Slump as Hawkish Fed Damps Cyclical Appeal

Uniqlo operator Fast Retailing Co. and chip-equipment maker Tokyo Electron Ltd. were the biggest drags on the Nikkei 225 Stock Average, which closed 3.3% lower. Electronics and chemicals makers were the largest drivers of the loss in the broader Topix, which fell 2.4%, with all but one of its 33 industry groups in the red.

Financial stocks also dropped, on a deepening slide in longer-term U.S. Treasury yields after the Fed last week sped up their expected pace of policy tightening. Inflation risks may warrant the start of interest rate hikes next year, St. Louis Fed President James Bullard said in an interview on CNBC on Friday, pointing to the possibility of an even earlier liftoff than indicated in the central bank’s comments a few days earlier.

“Yields are falling in a risk-off environment, so of course, cyclical and value stocks will be sold,” said Shogo Maekawa, a strategist at JP Morgan Asset Management in Tokyo. “If monetary tightening takes place earlier than expected, it may be bad for the business cycle in the long term, while lowering expectations over inflation.”

The Nikkei 225 surged 82% from its pandemic-selloff low to a 30-year high in February, as investors rushed into cyclical-heavy Japanese stocks amid expectations for economic reopenings. The blue-chip gauge has shed more than 8% since that peak amid concerns including the nation’s late vaccination drive and murky prospects for the Tokyo Olympics this summer.

Japanese Stocks Slump as Hawkish Fed Damps Cyclical Appeal

“Given the Japanese markets had been lacking a domestic catalyst and been hostage to global markets, it’s no surprise to see investors taking profits or cutting losses,” said Takeo Kamai, the head of execution services at CLSA Securities Japan Co. “However, given the Nikkei was still at a multi-year high and valuations weren’t necessarily cheap, this correction may be healthy.”

Japan’s Reopening Trade Picks Up as Vaccine Pace Quickens

The Nikkei is trading at 18.5 times 12-month forward estimated earnings, compared with its five-year average of 17 times and 20.8 times for the S&P 500.

With Japanese stocks finishing off their intraday lows, the market will be looking for daily data due out later showing whether or not the Bank of Japan stepped in to support the market. The BOJ had helped power Japanese stocks in recent years with purchases of exchange traded funds but didn’t buy any in May, its first full-month absence from the market since the program started in 2013.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.