(Bloomberg) — Japan’s financial markets trembled Monday as the yen extended its rally against the dollar to nearly 13% from a July low and stocks headed toward a bear market. Yields on Japanese government bonds fell by the most in two decades.
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The intensity of the moves continued to surprise investors, hitting everyone from small stock and currency traders to large hedge funds and institutions. The fall in bond yields cast a shadow over bank profits, leading to a record 21% intraday drop in shares of Mitsubishi UFJ Financial Group Inc., the nation’s largest lender.
The currency’s surge, which has accelerated since the Bank of Japan raised interest rates on July 31, is also having an impact on global markets, upending many investment strategies that have relied on cheap yen loans.
“What a complex situation for Japanese policymakers — loose monetary policy breaks your currency and a little bit of tightening breaks your stock market,” said Charu Chanana, head of currency strategy at Saxo Markets. The yen could hit 140 per dollar sooner rather than later if concerns about the risk of a U.S. recession continue to mount, putting further pressure on Japanese stocks, she said.
All 33 industry groups represented in the Topix index have fallen since the Bank of Japan raised interest rates. After falling more than 10% from its July peak in a correction on Friday, the gauge is poised to enter a bear market on Monday, down more than 20%.
“Falling stock prices mean that companies’ operating performance is expected to deteriorate in the future, and if the economy weakens, credit spreads may also come under increasing pressure,” said Noritaka Oda, head of debt syndication at SMBC Nikko Securities Inc.
According to data compiled by Bloomberg, the yield on Japan’s 10-year government bond fell as much as 17 basis points, the biggest drop since 2003.
Risk-averse sentiment is not just coming from Japan. The rally in global bonds that has sent yields lower largely reflects concerns about the U.S. economic outlook. Concerns are growing that the Federal Reserve is lagging behind in policy support and that global investors are shedding risky assets and seeking safe havens.
–With assistance from Ayai Tomisawa.
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