(Bloomberg) — The rapid decline in Japan’s stock market has likely triggered a massive wave of forced selling among retail investors, only deepening the downturn.
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The Topix index fell more than 7 percent, with companies such as Mitsubishi Heavy Industries and Sumitomo Mitsui Financial down more than 15 percent. The scale of the sell-off is so large that some market players believe individual investors are now being forced to dump stocks they bought on margin.
Margin-buying positions by retail investors rose to an 18-year high in late July, even as the Nikkei slid from its historic peak. Investors who bought stocks on credit are often forced to close their positions when stock prices fall more than expected, unless they have enough extra cash to use as collateral.
“We are seeing what looks like forced selling from retail investors. They seem to be damaged,” said Takatoshi Itoshima, a strategist at Pictet Asset Management. “While it is possible that we will reach a selling climax in the near term, I cannot say for sure.”
$30B margin trades raise risk for Japan: taking stock
Hopes for higher wages and economic growth have encouraged Japanese investors to buy stocks, a trend bolstered by new tax-free investment accounts the government launched this year. With the Nikkei 225 poised to erase nearly all of its gains since the start of the year, the bear market will test the sustainability of Japanese retail investors’ renewed appetite for domestic stocks.
“People who don’t have much experience in investing may not have experienced such big market declines, so the shock can be quite big,” said Masahiro Ichikawa, chief strategist at Sumitomo Mitsui DS Asset. “I think it will take a little longer for the market to stabilize after such big declines.”
–With assistance from Mari Kiyohara.
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