Tokyo shift

Japanese stocks join the global risk parade

Japanese equities have joined the global risk parade. The Nikkei's seven per cent drop looks like an overdue correction for an index that had risen by two-thirds in just six months. Yet, the selloff owes more to vague worries about global growth and money printing than concerns about Japan's economic renaissance. That's the drawback of becoming a magnet for risk-hungry investors.

The Japanese stock market has been riding for some kind of fall. By the close on May 22, the Nikkei had risen 67 per cent since the end of November. The rise was fuelled by Prime Minister Shinzo Abe's attempts to revive inflation and growth in Japan, and by the subsequent slide in the yen against the dollar, which benefits exporters. Sure, recent results from Japanese companies have shown that any revival in corporate earnings is lagging well behind the hopes of equity investors. What's remarkable, though, is the absence of any obvious domestic cause for the drop.

With such a volatile backdrop, searching for rational explanations for daily market fluctuations can be futile. Investors pointed to two culprits: US Federal Reserve Chairman Ben Bernanke's overnight comments about a possible slowdown in the central bank's bond buying, and weakness in a survey of Chinese purchasing managers. Here, it seems a stock-market rally prompted by increased optimism about the Japanese economy has morphed into a global-macro search for returns. Along with commodities and junk bonds, Japanese stocks have become a barometer of global investment sentiment.

Though a sustained selloff might reverse some of Japanese consumers' new-found optimism, concerns about stock-market volatility should be kept in perspective. More worrying, in many ways, are the recent sharp fluctuations in Japanese government bond yields. Investors appear torn between the possibility of higher inflation, which points to higher yields, and the Bank of Japan's massive programme of bond purchases, which will keep yields down. On the morning of May 23, the yield on 10-year government bonds hit 1 percent for the first time in over a year, before dropping sharply amid the general retreat from risk.

Japan's equities may have joined the global ranks of risky assets, and its bonds retain safe-haven status for now.

But the value of the country's sovereign debt should give more sizeable pause for thought.