Nikkei 225 Enters Correction as Tokyo Olympics Set to Kick Off

(Bloomberg) -- The Nikkei 225 Stock Average entered a correction, with Japanese equities declining for a fifth-straight day amid renewed concerns over the coronavirus as Tokyo prepares to host the Olympics.

Fast Retailing Co. and SoftBank Group Corp. were the largest contributors to a 1% loss in the Nikkei 225. The blue-chip gauge closed 10% below a February high, entering a technical correction after flirting with that level a few times since May. Electronics and auto makers were the biggest drags on the broader Topix, which also fell 1%, with all but two industry groups in the red.

The recent slide in Japanese stocks comes as the Tokyo Summer Olympic Games are set to start on Friday. Enthusiasm has waned with no fans to be in attendance, reports of a few athletes testing positive for Covid-19 and a cool reception from some corporate executives.

“The basic view is that about 40% of the population would have had at least one dose of vaccine by the end of July, leading to a decline in infection cases,” said Ryuta Otsuka, a strategist at Toyo Securities Co. “But the timing is bad, given the concern over the virus situation due to the Olympics, while there are only a few investors willing to make a move ahead of the earnings season.”

With a high proportion of economically sensitive stocks, the Japan market has been especially hurt by reversal of the reflation trade amid rising cases of Covid variants. The Nikkei is now down 0.2% on the year compared with a 13% gain for the S&P 500 and 9.5% rise in the MSCI World Index.

Investors in Japan Stocks Expect Turning Point After Olympics

The earnings season will get started in earnest after the upcoming four-day weekend. Canon Inc. sounded an early positive note, surging 9.2% on Tuesday, its biggest gain since 2009, after raising its full-year forecast. On the economic front, the nation’s consumer prices inched up for a second month but remained below levels fueling inflation fears elsewhere.

“The scenario that Japanese equities would play catch-up once vaccinations make progress is being written over in a big way because of the spread of the delta variant,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “It is possible that the recovery in both the economy and corporate earnings could be significantly delayed.”

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