Tokyo the centre of worry for global investors

Testing times: A man walks past the Bank of Japan headquarters in central Tokyo. Adding to investors’ confusion, the yen weakened about 2% yesterday after Uchida said the bank wouldn’t raise rates as long as markets are unstable. — AFP

TOKYO: In less than a week, Japan has completely upended the world’s expectations for its markets and economy.

The country was the darling of the financial world for over a year. Its weak currency pushed the stock market to record highs and rekindled inflation after decades.

Then the Bank of Japan (BoJ) hiked rates last Wednesday and governor Kazuo Ueda indicated he intended to keep going, helping trigger a sharp rise in the yen and wild gyrations across the global markets.

Traders and investors were forced to abandon strategies based on the macro view that Japan’s currency would stay weak and interest rates wouldn’t rise too fast.

“Without a doubt, this is new ground for markets” said Stephen Miller, a consultant at Grant Samuel Funds Management and former BlackRock Inc fund manager.

“There’s soul searching everywhere now that we have a BoJ that seems hellbent on getting away from years of zero or negative rates policy.

“Japan is now at the centre of emergent worries across everything – stocks, bonds, yen, credit, everything.”

Volatility coursed through Japan’s markets, with the Nikkei 225 suffering its biggest rout since 1987 on Monday, only to come back 10% the next day.

The whiplash carries implications for the country’s politics and households, as the market turmoil could impact consumer confidence and Japan’s delicate climb out of deflation.

Adding to investors’ confusion, the yen weakened about 2% yesterday after BoJ deputy governor Shinichi Uchida said the bank wouldn’t raise rates as long as markets are unstable.

“The risk is that consumption and investment will be held back due to the increased uncertainty in the markets,” said Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking Corp.

“If it drags on, it could affect business behaviour and households as well.”

The initial historic sell-off in the market indicates that any momentum trades hoping to profit from the weak yen and the broad rally in Japanese equities have been wiped out, according to analysts. The surge in the yen also derailed one of the most profitable market strategies this year – carry trades, which involve borrowing the Japanese currency to invest in other global assets.

The yen’s rebound set off a rush to take profits on these trades and close positions, which exacerbated the currency’s rise.

“This outsized response compared with previous instances of carry trades being quickly unwound suggests there is more at play in Japan than recession fears and could have global ramifications if it continues,” said Wei Li, global chief investment strategist at BlackRock.

Politicians and business leaders have sought to soothe concerns in Japan, particularly around expanded tax-free investment accounts, an initiative to get people to move some of the more than one quadrillion yen sitting in bank accounts as of March into the market.

Foreign investors that have stayed will likely take a longer view of companies that have been diligent about reform, business growth and balance sheet management.

“I think it’s a market that should now suit fundamental analysis, bottom-up rather than top-down,” said Pelham Smithers, whose London-based firm offers research on Asian companies with a focus on Japan.

“Going forward, it becomes an interesting time if you are a stock picker.”

There’s an emerging view that BoJ’s move was a misstep and influenced by political pressure, as several prominent politicians have called out the weak yen in recent weeks.

That could jeopardise the relationship between the Japanese government and the central bank and impact Prime Minister Fumio Kishida’s bid to be re-elected as the head of Japan’s ruling party next month, said Takuji Aida, chief economist at Credit Agricole. — Bloomberg