(Bloomberg) — Turmoil in Japan’s financial markets intensified Monday as the yen extended its rebound against the dollar to almost 13% from July’s low and stocks headed for a bear market. Yields on benchmark Japanese government bonds tumbled by the most in two decades.
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The intensity of the moves continued to take investors by surprise, hurting everyone from mom-and-pop traders of shares and currencies to large hedge funds and institutions. The slump in bond yields cast a shadow over bank earnings, triggering a record 21% intraday decline in the shares of Mitsubishi UFJ Financial Group Inc., the nation’s biggest lender.
The sharp appreciation of the currency, which has gathered pace since the Bank of Japan increased interest rates on July 31, is also rumbling through global markets as it upends countless investment strategies that were built on cheap borrowing in yen.
“What a complex situation to be in for Japanese policymakers — a loose monetary policy kills your currency and a slightest hint of tightening breaks your stock market,” said Charu Chanana, head of currency strategy at Saxo Markets. The yen may get 140 to the greenback sooner rather than later if concern over the risk of a US recession continues to rise, which will further weigh on Japanese stocks, she said.
All 33 of the industry groups represented in the Topix index have fallen since the Bank of Japan raised interest rates. After falling into a correction on Friday with a slump of more than 10% from its July peak, the gauge is Monday set to enter a bear market with the decline now in excess of 20%.
“Falling stock prices mean that companies’ business performances are expected to deteriorate in the future, and if the economy weakens, credit spreads may face widening pressure as well,” said Noritaka Oda, head of debt syndication at SMBC Nikko Securities Inc.
The benchmark 10-year Japanese government bond yield slid as much as 17 basis points, the most since 2003, according to data compiled by Bloomberg.
The risk-off sentiment isn’t all emanating from Japan. The rally in global bonds that’s sent yields spinning lower in large part reflects worries over the US economic outlook. Concern is growing that the Federal Reserve is behind the curve with policy support and global investors are ditching risk assets and going into safe havens.
–With assistance from Ayai Tomisawa.
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