Japan’s strides toward economic recovery, symbolized by buoyant Tokyo stocks, have become mired in quicksand as fears of a slowdown in China have broadened into wide-reaching concerns about global growth.
The 225-issue Nikkei Stock Average closed down nearly 3 percent Friday on the heels of steep sell-offs in Shanghai. Friday night brought further carnage to European and U.S. equity markets.
Some analysts now say the Nikkei could sink to the 16,000 level before the end of the year, vastly below earlier forecasts based on a firm outlook for Japan’s economy and a weakening yen.
Shanghai stocks’ downward spiral and the surprise moves of the People’s Bank of China (PBOC) to sharply devalue the yuan against the U.S. dollar earlier this month have stripped investors’ confidence.
China’s desperate currency moves have suggested the country’s real economic health could be in a worse state than previously thought, said Hiroichi Nishi, assistant general manager of investment research at SMBC Nikko Securities Inc.
“Investors are doubly worried that further yuan weakness may stunt the growth of China’s emerging economy trading partners in Asia and beyond by hurting their exports,” Nishi said.
Suppressed risk appetite is bad news for Tokyo issues, not least because many listed firms are counting on the yen’s continued weakness to boost profits from export-oriented activities. Increased risk aversion tends to push up the yen, widely regarded as a safe haven.
“The existing narrative of the Japanese economy strengthening on large-scale monetary easing has also collapsed,” said Tomoichiro Kubota, senior market analyst at Matsui Securities Co.
Without decisive action from Chinese authorities, the Nikkei could sink as low as 16,000 before the year is out, he said.
As world markets continued to reel, U.S. Treasury Secretary Jack Lew expressed concern about the yuan moves Friday.
According to the U.S. Treasury Department, Lew told Chinese Vice Premier Wang Yang that China should seek an economy “driven primarily by household consumption rather than exports.”
The apparent caution against China’s driving its currency down further came after PBOC Vice Gov. Yi Gang — at a rare news conference on Aug. 13, where only designated news organizations were allowed to attend — flatly denied that the yuan devaluation was designed to boost Chinese exports.
China’s economic health has long been shrouded in a degree of mystery — a characteristic that investors did not seem to mind during boom times, but that is now making them nervous.
The Financial Stability Board, a global financial system watchdog, called for a higher degree of transparency about policy moves in its recent review of the PBOC and related agencies.
When Shanghai stocks started to drop rapidly after months of steep gains earlier this year, some analysts said the market was merely shedding itself of a glut of retail investors, who had jumped on the bull bandwagon but were forced out after unsuccessful margin trading.
The Shanghai market plunge, however, seems to mean much more than that. Cracks have appeared elsewhere in the Chinese economy, as confirmed by the latest Caixin flash purchasing managers’ index that hit a six-year, five-month low of 47.1 in August, showing a further contraction in China’s manufacturing sector.
In Japan, companies depending on Chinese demand for commodities, manufacturing components and finished products, as well as inflows of Chinese tourists, have all seen stock prices fall. And global risk jitters have driven investors to sell highly priced Japanese stocks to bury their investment losses in other markets, according to a major brokerage official.
A survey of 108 major Japanese firms by Kyodo News showed Saturday that worries about China are beginning to hit home. Of the 17 respondents describing domestic economic conditions as “flat,” nine cited concerns of a Chinese slowdown as the reason.
Despite Japanese firms posting broadly firm earnings in the April-June quarter, Japan’s gross domestic product shrank an annualized 1.6 percent in real terms in the same quarter, with consumer spending particularly stunted.
Uncertainty on future U.S. monetary policy also weighs on Tokyo stocks as their investors wait for the Federal Reserve to raise U.S. interest rates, a move set to strengthen the dollar against the yen to the advantage of Japanese exporters.
Expectations of an initial U.S. rate hike in September had appeared to be firming, but a series of mixed data and comments by Fed officials keep market bets split, while the latest stock market collapse may add to the Fed’s hesitance.
Hitoshi Ishiyama, chief strategist at Sumitomo Mitsui Asset Management Co., said Tokyo stocks could yet gain strength from fresh stimulatory policy from Prime Minister Shinzo Abe’s administration.
Such reforms may come to the fore after the government clears the hurdle of passing contentious security legislation, and in that event the Nikkei has a chance of rebounding to the 22,000 level before the end of the year, he said.
But for now, any positive developments on the domestic front will likely be drowned out by the sound of alarms on global economic growth and the wide-reaching repercussions of a slowing China.