Japan stocks suffer biggest two-day plunge since 2011 tsunami

Japanese stocks began to fall sharply on Thursday but turned into a full-blown sell-off on Friday, with the Topix posting its biggest two-day drop since the 2011 tsunami.

That’s a dramatic reversal from the record highs hit in July, when Japanese stocks were hailed as one of the world’s strongest markets. The Topix fell 6.1% on Friday, bringing its two-day decline to 9.2%, following the Bank of Japan’s sooner-than-expected interest rate hike on Wednesday and hawkish messaging from Governor Ueda Kazuo. The Topix entered a technical correction along with the Nikkei.

“We didn’t expect stock prices to fall this much. It’s a disaster,” said Kiyoshi Ishikane, chief fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo. “It may be temporary, but Japanese stocks are in the worst situation.”

Japanese stocks’ sharp reversal in recent weeks comes as the yen has risen to a four-month high against the dollar, hurting exporters including Honda Motor Co. and as rising yields have dented property companies such as Mitsui Fudosan Co. Just three weeks ago, Japanese stocks were hitting record highs as the financial industry cheered the prospect of an interest rate hike from the Bank of Japan.

Investors took profits in financial stocks, which were among the best-performing in the Topix, on the view that they would benefit from rising interest rates. The stock index tracking the banking sector fell 11%. “This looks like a significant forced sell-off,” said Andrew Jackson, head of Japan equity strategy at Ortus Advisors. “You can imagine a lot of platform-based, pod-structured companies are aggressively reducing risk, triggering blind selling in names that are even slightly more crowded.”

A big concern for stocks is the yen, which hit 148.51 yen against the dollar on Thursday, its highest since mid-March. Strategists at Amundi and TD Securities have suggested the Japanese yen could rise to 140 yen. “The bottom line is, it’s mainly the yen,” said Kyle Rodda, senior market analyst at Capital.com. “The market is growing hopes of a U.S. rate cut, driven by concerns that economic activity may slow at a time when the Bank of Japan is just beginning to tighten policy.”

Foreign investors, once the main driver of the market rally, made a net sale of 1.56 trillion yen ($10.4 billion) of Japanese spot stocks and futures in the week to July 26, according to data from the Japan Exchange Group. Over the same period, the Topix fell more than 5%, its biggest drop in four years.

Buying back from big tech stocks exacerbated the decline in stocks as signs of strain in the U.S. economy led traders to reconsider the wisdom of Federal Reserve Chairman Jerome Powell delaying any interest rate cuts until September. Data released on Thursday showed U.S. jobless claims hit the highest level in nearly a year and manufacturing contracted.

Tech stocks were the biggest fallers in the Nikkei average, with Tokyo Electron falling 12% and SCREEN Holdings dropping 13%.

“Foreign investors appear to be selling as the outlook for corporate earnings is changing due to concerns about a slowdown in the U.S. economy and a stronger yen,” said Ryuta Otsuka, a strategist at Toyo Securities. “In the short term, it’s clearly a bearish market, and concerns about the U.S. and Chinese economies may also be starting to change the medium-term trend of Japanese stocks.”