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How does Tokyo deal with the stock price decline?

MWith a minus of 5.1 percent of the Nikkei index, the Japanese stock market is one of the big losers in the price slump at the beginning of the week. Only the Australian stock market performed worse on Monday, which was particularly hard hit by the fall in the price of crude oil. The uncertainty about the further development of the coronavirus epidemic and the turbulence on the oil market caused investors to seek refuge in the yen. The Japanese currency temporarily appreciated more than 3 percent against the US dollar and moved close to the 100 yen per dollar mark at 101.5 yen per dollar. This put an additional strain on share prices.

Patrick Welter

Patrick Welter

Correspondent for business and politics in Japan based in Tokyo.

The Nikkei index started the trading day with a minus of more than 6 percent and ultimately lost more than 1000 to 19699 points. For the first time since the beginning of September, the index was again below the psychologically important 20,000 mark. The broader Topix, which lost 5.5 percent to 1080 points, was hit even harder than the Nikkei index.

The reasons for the slump are reflected in the losers and winners on the Tokyo stock market. The oil company Inpex lost 13 percent to 766 yen. Heavy machinery maker IHI, which also builds oil refineries, lost 12.9 percent to 1,784 yen. In contrast, Nichirei performed best among the Nikkei 225 companies, whose share increased by 2.5 percent to 2,833 points. Nichirei produces frozen foods and benefits from the Japanese fears of the spread of the corona virus.

Economists expect shrinkage of up to 0.8 percent

Adding to the negative sentiment in Tokyo was the fact that revised economic data made the Japanese economy look even worse at the end of last year than was previously known. The real gross domestic product shrank in the period from October to December by 1.8 percent compared to the previous quarter and thus even more than the previously reported 1.6 percent. The slump in growth is a direct result of the increase in consumer tax from 8 to 10 percentage points last October.

The outbreak of the new corona virus is now weighing on the rest of the months. Economists expect the current quarter to shrink by 0.5 percent (Goldman Sachs) or 0.8 percent (Morgan Stanley MUFG), although forecasts with the globally spreading virus epidemic are being lowered almost every week. Economic output is also shrinking for the year as a whole.

In Tokyo, there is speculation as to how the government will respond to the deteriorating economic outlook. Prime Minister Shinzo Abe’s cabinet is expected to present plans for a new stimulus package on Tuesday. As indicated by Abe, this should primarily be about help for companies that are particularly affected by the slump in demand or temporarily interrupted trade relations with China or South Korea. As early as December, when the miserable state of the economy became clear after the increase in consumption tax, the government had decided on a fiscal package of 13.2 trillion yen (110 billion euros) to support the economy.

There is also speculation about a monetary policy intervention by the Bank of Japan, which will receive regular monetary policy advice next week. The central bank had tried to verbalize the markets in early March to calm the markets. Japan has not yet responded to the rate cut by the US Federal Reserve (Fed). The scope for an interest rate cut in Japan is also small because the short-term interest rate is already held by the central bank at minus 0.1 percent. The economists of Morgan Stanley MUFG, for example, tend to rate the positive effects of a marginal interest rate cut on the economy as low.

However, an exchange rate of 100 yen per dollar is regarded as a red line in surveys among market observers, the drop below which will result in an interest rate cut by the Japanese central bank. The effects of a small interest rate cut by the Japanese on the exchange rate are questionable, however, because further interest rate cuts by the American Federal Reserve are already expected on the financial markets.

It could therefore be more attractive for the Bank of Japan to loosen its monetary policy further quantitatively, i.e. to buy securities in order to pump money into the market. The central bank was already moving in this direction in the first days of March. It has already bought tradable fund shares (ETF) with a record volume of 100 billion yen (840 million euros) twice, on the second and sixth of March, thereby supporting share prices.

Goldman Sachs and Morgan Stanley MUFG expect the Bank of Japan to continue in this direction and to buy more ETF securities in the coming weeks without changing the purchase volume of around 8 trillion yen for the full year. Such a buying policy could offset the fact that the central bank had slowed its monthly purchases against the target since October.

State pension funds could hold more foreign bonds

A third speculation against a further appreciation of the yen is directed towards the state pension investment fund (GPIF), which is also called “the whale” because of its investment volume of 160 trillion yen. On the foreign exchange market, it is speculated that the investment fund will change its investment strategy in April and give more weight to foreign bonds.

The fund has so far set a target of 35 percent Japanese bonds and 15 percent foreign bonds. There is speculation that the demand in anticipation of a correction in the investment strategy can already buy foreign bonds and thus weaken the yen. With the current decline in bond interest rates, for example on American government bonds, such purchases are currently expensive.

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