Nikkei 225's Christmas Plunge Has Traders Bracing for More Pain

(Bloomberg) -- Christmas Day brought no presents for the Japanese stock market, as the Nikkei 225 Stock Average plunged below 20,000 and slipped into a bear market. Investors are bracing for more pain to come.

The Nikkei 225 sank 5 percent on Tuesday for the biggest single-day drop since November 2016, taking its cue from U.S. equities, which tumbled during a shortened trading day on Christmas Eve. It followed the broader Topix index into a bear market with a 21 percent decline from a high on Oct. 2. For Hajime Sakai, the chief fund manager at Mito Securities Co. in Tokyo, a combination of panic selling and a lack of buyers in thin holiday trading suggests the declines may have further to run.

“Market sentiment is too weak,” Sakai said. “Investors are selling emotionally as the markets keep declining. There are no buyers as liquidity has dropped during the Christmas holidays and year-end.”

Japanese equities are being caught up in a global equity sell-off spurred by everything from concerns about the U.S.-China trade war to central bank policy tightening and political uncertainty in the U.S., where the country's government is partially shut down over the Christmas period. The rout has become so pronounced in Japan that the Topix is heading for its worst December on record.

U.S. Uncertainty

Some analysts pointed to instability in U.S. President Donald Trump's government as one reason for the declines, citing Secretary of Defense Jim Mattis becoming the latest person to resign from his position. The steep decline in Japanese equities on Christmas Day came after a barrage of tweets from Trump defending his policies.

“Policy uncertainty about Trump's government is getting stronger as excellent staff members who formed the backbone of the administration leave,” said Nobuyuki Kashihara, chief global strategist at Asset Management One Co. in Tokyo.

One consequence is that the yen has been strengthening again, weighing on the giant exporters that make up the Nikkei 225. The currency has gained for eight straight days against the dollar. “Until now, even though a risk-off mood was gaining ground, the dollar had remained high against the yen,” Kashihara said. “But if a stronger yen takes hold, that will have a big influence on Japanese stocks.”

Rational Decision

Even though the Nikkei's sell-off on Tuesday was intense, not everyone sees it as an emotional reaction by investors. For Satoshi Okumoto, the chief executive officer of Fukoku Capital Management Inc., it's a result of rational decision-making.

“It's not panic selling, it's calm selling based on cool-headed decisions,” he said. “U.S. stocks are still at high levels, and the mentality has been to take profits. U.S. equities are having a big adjustment, and Japanese shares are adjusting as a result.”

But that doesn't mean Okumoto is nonchalant about the prospects for Japanese equities as the Nikkei 225 heads for a 16 percent decline this year. In fact, he sees a risk that shares could drop to levels that would stun investors over the next few months, if bad news and external events continue to roil the markets.

“If the sell-off keeps going, there are concerns that it will start having an impact on the balance sheets of some financial institutions,” he said. “There's a risk of hitting a shock low from January to March, depending on events and the newsflow.”

Yoshinori Shigemi, a global market strategist for JPMorgan Asset Management Japan Ltd., said it's difficult to predict how stocks will regain momentum.

“It's unclear what will become a catalyst for a rebound in the markets,” he said. “There are ongoing concerns over the government shutdown and you never know what President Trump will say, so risk-averse moves may be set to continue.”

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net;Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Tom Redmond