The Return of Risk: Japan's Stock Market Falters

Just a few months ago, there was a celebratory atmosphere on Tokyo's trading floors. Stock indices broke celebrated all-time highs from 1989, and it seemed as though Japan was back on the global stage. However, the recent plunge has cast doubt on the sustainability of this recovery. In the first 20 minutes of trading on Monday, the Topix index had already lost 7 percent, while the yen continued to strengthen against the dollar. A market participant stated, "The market is moving as it did during the global financial crisis, but without an actual crisis as the trigger. Japan remains the place where the world punishes risk." The speed and intensity of the correction have surprised many observers and could fundamentally change the recently optimistic views on the Japanese market. A burdensome combination of recession fears in the United States, the danger of panicked interest rate cuts by the US Federal Reserve, and unsettling geopolitical tensions are weighing on investors' risk appetite globally. Specifically for Japan, the 12 percent rise of the yen against the dollar in recent weeks has shaken the profit expectations of many Japanese companies. Last Friday, the Nikkei 225 index recorded its largest single-day point loss since the crash in October 1987, only to surpass this somber record again on Monday. The broader Topix index has fallen by more than 20 percent since its all-time high in July and is now 5 percent below the level at the beginning of the year. All this despite everything supposedly being different this time: Large international funds, attracted by the prospects in Japan, had significantly increased their exposure. Warren Buffett's Berkshire Hathaway repeatedly strengthened its holdings in Japan's five largest trading companies, which many interpreted as a call to reassess the Japanese market. However, the recent weeks have painfully reminded that Japanese rallies, due to the broad nature and liquidity of the market, are always susceptible to setbacks. As many global funds have reduced their exposure to China, they are now focusing their risk management more on Japan, making it easier to sell Japanese securities. The Japanese market, often described as a "warrant on world trade," tends to be bought when global prospects are optimistic and themes like semiconductors or artificial intelligence are relevant. In addition to global reasons, there are also many domestic issues that could necessitate a quick reassessment, such as the end of deflation, significant domestic consolidations, and a tourism boom. However, all these hopes have been called into question by the recent market crash. A critical question is how much of the blame can be attributed to the small but crucial interest rate hike by the Bank of Japan last week. Was Japan ever robust enough to return to normality after decades of ultra-loose monetary policy? Will the central bank now be forced to again act as a supportive buyer? In any case, the Japanese market offers global investors plenty of opportunities to express their diverse concerns. This combination of global and local uncertainty factors leads to a unique situation. Whether the plunge now ends remains to be seen. However, it is certain that Japan faces a challenging task of convincing everyone that this crisis truly is different.