Japans financial markets recovered some of this weeks losses, after foreign institutional investors saw the dramatic price plunges as a buying opportunity.
Japan’s Nikkei average rose by 5.7% on Wednesday, after having plunged 10.6% on Tuesday. On Monday and Tuesday this week, the Japanese markets saw the worst plummet in equity prices since the 1987 crash.
For the third trading day this week, the volume on the Tokyo Stock Exchange’s first section was 4.9 billion shares.
On Monday, market participants dramatically pushed up trading volumes while volumes on Tuesday reach an all-time high of 5.8 billion shares.
“The initial drop in the Japanese equity market was partially panic-driven”, says Stefan Angele, Head of Investment Management at Swiss & Global Asset Management. “The earnings picture of the Japanese corporate sector is unlikely to be significantly affected by this disaster. Global stock markets had started to correct before the earthquake, which then accelerated the selling pressure. However, I still believe that neither the global business-cycle expansion nor the earnings outlook for the major economies has materially changed. In fact, I would see further stock market weakness as a buying opportunity.”
On Friday March 11. a massive earthquake that measured 8.9 on the Richter scale hit Japan. The quake hit off the North Eastern coast and caused a 10-metre-high tsunami to hit the coast. Japan authorities reported there is a nuclear power emergency situation with four million homes without power, following the largest earthquake to hit Japan on record. Meteorological agencies are also reporting that there is a 70% chance of aftershocks with magnitude of 7 or higher to hit Japan.
On Monday, the country s central bank Bank of Japan revealed it would inject a total JPY 15 trillion ($183.8 billion) into the country’s financial system, in a bid to stabilise the markets. It also doubled the maximum outstanding amount for each financial asset purchased through the Asset Purchase Program.
The maximum outstanding amount of financial assets purchased through the Program shall be about JPY 10 trillion. The maximum outstanding amount of loans provided through the Program shall be about JPY 30 trillion.
Japanese government bonds with coupons about JPY 2 trillion, treasury discount bills will be around JPY 3 trillion, JPY 2 trillion for CP, JPY 2 trillion for corporate bonds, JPY 0.9 trillion for beneficiary interest in index-linked exchange-traded funds (ETF) and JPY 0.1 trillion for Investment equity issued by real estate investment corporations.
However, the contagion for a selloff was reflected in the wider Asian markets. At the lowest point in the trading session, Singapore fell more than 3% to its lowest level since last August.
The main index in Hong Kong also fell 2.86%, South Korea slid by 2.40% while Australia dropped 2.11%.
As of March 15. market close, Japan’s stock market plunged 10.6%, as the Nikkei lost 16% of its value since Monday.
However, experts say that the selloff had gone too far and that is why market rebounded.
“The initial reaction of the financial markets was violent, with Japanese stocks plunging and risk premiums on yen bonds soaring”, says Angele.
On Wednesday, the TOPIX rallied 6.6% to 817.63 and Osaka Nikkei futures climbed by 4.2% at 9,000 in the regular session.
Following the rebound in stocks, Japanese sovereign credit-default-swap (CDS) spreads narrowed by 14 basis points (bps) to 102 bps.
“Japan is the third largest economy globally, but accounts for only 6% of global GDP”, says Angele. “This very much limits the potential impact of a domestic GDP shrinkage on the world economy, which is expected to grow something above 4% in 2011. This said, the global impact of the events in Japan is more likely related to specific industries and sectors than be a significant threat to global economic growth.”
However, the uptick in financial instrument prices could bring relief to some of the most widely used products used by institutional investors, which are held by custodians, such as ETFS.
In 2010, ETF investors concentrated their new investments in several asset classes, most notably emerging market equity, commodities, US, German and Japanese equity, as well as Euro government bonds, said State Street Global Advisors (SSGA) in its latest report SPDR ETF Outlook 2010.
Last year, ETF assets in Europe increased by 56 billion to more than 227 billion – a gain of more than 30%. SSGA said that equity-based ETFs continued to dominate in terms of total assets in Europe, accounting for seven of the top ten categories and approximately 70% of total assets.
Japanese equity and Asia Pacific ex-Japan equity provided some of the highest returns out of the listed 19 asset classes listed in the report in 2010.
Japanese equity, derived from the MSCI Japan NR delivered a return of 23.5% in 2010, while Asia Pacific ex-Japan equity, derived from the MSCI AC Asia Pacific Ex JPN NR, delivered 26.3%. The highest level of return from an asset class was gold, with a 38.2% return for 2010, according to the SSGA report.