Japanese stocks plunged amid a global equity selloff as the yen surged to the highest level against the US dollar in more than a year, while financial companies plummeted on growing global unease over profitability and credit quality.
The TOPIX sank 5.5 percent to 1,304.33 on Monday, closing in Tokyo with the largest decline since August last year. Brokerages and banks led the rout as all of the gauge’s 33 industry groups fell.
The Nikkei 225 Stock Average lost 5.4 percent to 16,085.44, its biggest drop since June 2013. The yen surged 1 percent to ¥114.75 per US dollar, the strongest level since November 2014.
Mitsubishi UFJ Financial Group Inc led banks lower, dropping 8.7 percent to wipe out US$5.3 billion in value and close at the lowest level in three years.
Financial firms globally have been under pressure as tumbling interest rates squeeze profitability while existing loans sour on slower economic growth. On Monday, Deutsche Bank AG became the largest lender in at least four years to feel compelled to reassure investors and employees that it has enough cash to pay its debts.
“We had a bubble in people’s expectations of the power of central banks. And now we’re seeing that bubble burst,” said Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd in Tokyo. “Investors are pricing in the fact that central banks can no longer control markets. That became apparent after the Bank of Japan’s [BOJ] last stimulus, and now a similar view is strengthening about the ECB.”
Japan’s currency has strengthened against the US dollar despite diverging policies taken by each nation’s central bank, with the Bank of Japan last month introducing negative interest rates while the Federal Reserve raised borrowing costs in December last year and signaled more increases this year.
Japan’s benchmark 10-year government bond yields dropped below zero for the first time, underscoring the challenge for banks to make money from lending in the world’s third-largest economy. It fell 7.5 basis points to a record minus-0.035 percent as of 3:05pm in Tokyo yesterday.
Monji said a full-blown financial crisis is unlikely to occur as banks are unable to take as much risk as they did in the past, making a default less likely.
“Earnings might deteriorate — especially in Japan after the BOJ implemented negative rates — but that’s different from a crisis,” Monji said.
The yen has climbed against its 16 major counterparts this year despite the BOJ’s negative rates policy. Investors rattled by increasing volatility across financial markets have brushed aside the easing and continued to buy yen and exit bets on currencies that offer higher yields.
“Markets are seeing the negative side of minus rates, that it is weakening financial institutions and that it’s not a reflationary policy but is essentially planting a deflationary mindset in people,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management. “People are skeptical that further monetary policy action can help lift the economy.”
The yen’s biggest gains since Dec. 31 have been a 14 percent appreciation versus the Mexican peso, a 10 percent advance against the South African rand and an almost 9 percent climb versus the New Zealand dollar. It has strengthened 5 percent against the greenback.
“It’s clear that rough moves can be seen in the overall market,” Japanese Finance Minister Taro Aso said yesterday. “We’ll continue to closely watch the FX market.”
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