The Nikkei stock average plunged more than 6 percent to its lowest level in over two months Thursday in Tokyo as a surging yen and worries about the potential tapering of central bank stimulus triggered major bloodletting after weeks of wild volatility.
The benchmark Nikkei index dived 6.35 percent, or 843.94 points, to close at 12,445.38, slicing about 20 percent off its peak above 15,600 last month and meeting the typical definition of a bear market.
The broader Topix index of all first-section shares slid 4.78 percent, or 52.37 points, to close at 1,044.17.
The dollar meanwhile sank to a 10-week low of ¥93.98 in afternoon trading in Tokyo after sliding to ¥95.88 in New York late Wednesday. It had been trading above ¥100 in recent weeks.
Thursday’s drop in the stock market was largely attributed to speculation about the beginning of the end of central banking stimulus — particularly from the U.S. Federal Reserve. The Fed’s unorthodox monetary easing policy has been credited with propping up global equity markets.
However, cracks have also begun to emerge in “Abenomics,” the much ballyhooed plan by Prime Minister Shinzo Abe to revive the world’s third-largest economy.
Last week, investors turned up their noses at the carefully orchestrated plan as Abe announced its “third arrow,” which some viewed as another half-hearted bid to launch structural reforms in the deflation-mired economy.
Foreign investors had been piling into the market since Abe was elected late last year with high hopes. He and his chosen Bank of Japan chief replacement started out by telegraphing big fiscal spending and radical monetary easing plans that would weaken the yen and stoke inflation.
Stocks, of course, soared as investors rushed to make sure bets on exporters, as the bond market began gyrating when the BOJ jumped in with both feet.
“It’s a kind of a chicken-and-egg situation — volatile markets keep buyers away and the absence of buyers leads to market volatility. We are trapped in a negative spiral right now,” said Hirokazu Kabeya, senior strategist at Daiwa Securities.
Ever since the global financial crisis struck in 2008, investors have been flocking to the yen in times of turmoil and uncertainty, putting pressure on the stock market.
“The Nikkei falls because the dollar/yen falls, then the dollar/yen falls further because the Nikkei has fallen — markets are in this vicious circle,” said Atsushi Hirano, head of FX sales Japan at Royal Bank of Scotland.
Given the continued volatility in the equity and currency markets, BOJ Gov. Haruhiko Kuroda met with Abe on Thursday.
“I told the prime minister that the BOJ, needless to say, will promote quantitative and qualitative monetary easing with strong determination and prop up the Japanese economy,” Kuroda said later.
Thursday’s pounding of the dollar returned the dollar-yen rate to its levels before the BOJ prematurely switched chiefs in April so Kuroda could launch his plan to unleash a torrent of easy money in what is turning out to be a one-sided bid to reverse years of falling prices and tepid growth.
“A clear breach of ¥95 will open the pair’s downside to ¥92,” Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo, told Dow Jones Newswires earlier in the day.
A senior trader at a major Japanese bank said further losses in the Nikkei would be a negative sign from investors about Abe’s naked reform plans — the other, more critical side of his slickly promoted revival strategy.
“An eventual breach of 12,000 for the Nikkei could see forex rates and share prices returning to levels seen before the BOJ’s decision” in early April, he said. “If that happens, we’ll just be left with higher bond yields.”