Japan’s Nikkei index has fallen 20% in 16 trading days in a sharp reversal of the previously successful long Japan equity, short yen trade….
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Andrew Rose, Fund Manager, Japanese Equities
At the same time, volatility has risen to levels comparable to the immediate aftermath of the Tohoku earthquake and nuclear disaster. The 20% number has led, inevitably, to headlines of a “bear market”. However, it should be noted that the decline in the broader Topix index is a more modest, but still dramatic, 14%.
The difference in degree of decline in the two indices is itself instructive. It is indicative of the role of futures trading, which itself reflects the disproportionate role of shorter term players (macro hedge funds, domestic day traders) in the market’s ascent since last November.
What was the catalyst for the reversal in sentiment?
There is no individual reason. However, in the very short-term the fact that the Bank of Japan refrained from making any changes at this week’s policy meeting may have disappointed some. More broadly, Japan is turning out to be a leveraged play (given that it had gone up so much) on reduced risk sentiment and the sense of malaise afflicting equity markets more generally, associated with possible Federal Reserve “tapering” of asset purchases. The steep rise in volatility across yen assets is adding to the sense of unease.
Are there implications for “Abenomics”?
It would be wrong to reach conclusions one way or the other as, in any meaningful sense, “Abenomics” should be viewed as a multi-year, not multi-week trend. Volatility seems likely in the short term but the underlying trends of a weak yen and end to deflation do not appear to have changed.
Source: ETFWorld – Schroders
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