Japan Stocks Fall as Geopolitical Risks Counter BOJ Optimism

(Bloomberg) -- Japanese shares declined as concerns over a North Korean nuclear test countered optimism the Bank of Japan will support the market by buying exchange-traded funds.

The Topix index seesawed from a gain of as much as 0.3 percent to a drop of 0.4 percent before closing lower on Friday as investors digested news on North Korea conducting a nuclear test and a European Central Bank monetary policy decision. Meanwhile, hopes for supportive action from the BOJ were underpinning the market in afternoon trading.

“We can probably say that the market is reacting a little to signs North Korea conducted nuclear tests,” said Soichiro Monji, general manager for the economic research department at Daiwa SB Investments Ltd. “We’re not seeing a huge amount of trading on this news, but it does contribute to a slight risk-off mood.”

North Korea conducted its fifth nuclear test on Friday, the anniversary of the reclusive nation’s founding, and said it was now able to produce miniaturized nuclear arms. Chief Cabinet Secretary Yoshihide Suga said North Korea’s arms development was a threat to Japan and the country would consider further sanctions against the regime.

Japanese shares also tracked a global equity decline after ECB President Mario Draghi played down the prospect of an increase in asset purchases at a time when there’s concern over the impact to the euro-area recovery from risks including Britain’s decision to leave the European Union.

“The ECB’s decision to refrain from adding to stimulus wasn’t particularly a surprise, but the bond and currency markets reacted to it,” said Mitsuo Shimizu, deputy general manager at Japan Asia Securities Group Ltd. in Tokyo.

Stocks in Tokyo climbed for a second week, gaining 0.2 percent and adding to last week’s 4.1 percent advance, ahead of a meeting by the BOJ on its monetary stimulus measures. The central bank purchased 73.3 billion yen ($718 million) of ETFs on Wednesday, excluding those linked to supporting investment in physical and human capital. BOJ Governor Haruhiko Kuroda and Prime Minister Shinzo Abe had a lunch meeting in Tokyo on Friday, where Kuroda said he explained the BOJ’s comprehensive policy review and discussed the economy and financial markets.

“There’s still expectations that the BOJ will buy ETFs so the market is trading solidly,” said Masayuki Otani, chief market strategist at Securities Japan Inc. in Tokyo.

Volume was about 2.7 percent below the 30-day intraday average on the Topix, as 11 shares fell for every seven that advanced on the benchmark index.

• Energy shares climbed as crude headed for a weekly surge of more than 6 percent following an unexpected drop in U.S. stockpiles. Petrochemical-products maker Showa Denko KK was among the biggest gainers on the Nikkei 225 Stock Average, climbing 5 percent.
• Bowling-alley operator Round One Corp. tumbled 6 percent after August same-store sales dropped 4.6 percent from a year earlier.
• Kyocera Corp. added 1.9 percent after BNP Paribas SA raised its rating on the electronics equipment manufacturer to hold from reduce.
  

Futures on the S&P 500 Index were little changed. The underlying equity gauge fell 0.2 percent on Thursday, slipping from record-high levels. As of Thursday, traders were pricing in a 28 percent chance the Federal Reserve will raise U.S. borrowing costs, up from 22 percent a day before.

To contact the reporters on this story: Yuko Takeo in Tokyo at ytakeo2@bloomberg.net, Hideki Sagiike in Tokyo at hsagiike@bloomberg.net. To contact the editors responsible for this story: Jeff Sutherland at jsutherlan13@bloomberg.net, Andreea Papuc, Andrew Janes