Japan's Topix fell 24% from its record high hit last month as investor confidence waned, with the Nikkei 225 posting its biggest one-day drop ever in yen terms. The Topix and Nikkei 225 fell 12% on Monday, with the two major benchmarks entering a bear market amid factors such as a surge in the yen, tightening monetary policy and a deteriorating U.S. economic outlook. Based on data compiled since 1959, the Topix posted a record three-day decline.
Technology and banking stocks were the biggest drags on the Topix. The yen surged more than 3% against the dollar as carry trades were unwound. Japan's 10-year government bond yields plummeted by as much as 20 basis points, bank stocks fell, and stock index futures triggered circuit breakers multiple times.
"We're seeing basically a massive deleveraging in the market, with investors selling assets to cover losses," said Kyle Rodda, senior market analyst at Capital.Com. "The market was moving so fast that I was caught off guard; there's a lot of panic selling right now, causing asset prices to react non-linearly to very simple fundamental dynamics."
All 33 industry sectors of the Topix Index fell. Since the Bank of Japan raised interest rates on July 31, the sharp rise in the yen has cast a shadow on the profit prospects of exporters.
As global stock markets plummet, even insurance companies and banks that were expected to benefit from the rate hike are now losers since the Bank of Japan raised interest rates. Mitsubishi UFJ Financial Group's share price fell 18%, the largest drop in history.
"Many people who were long yen weakness and soft landing scenarios are being forced to close their positions," said Jin Investment Management Pte. Said Rafael Nemet-Nejat, senior portfolio manager. “This move is very extreme, especially if long positions are crowded.”
Looking at the implied volatility of the Nikkei 225 Volatility Index, uncertainty about the future of the stock market has seen the largest increase on record.
As the main factors driving the market's rise fade, Japan Exchange Group Inc. Data show that in the week ending July 26, foreign investors sold a net 1.56 trillion yen ($10.7 billion) of Japanese stock spot and futures.
"This round of sharp declines in the stock market, coupled with the decline in the U.S. market and the impact of technology stocks leading the decline, may lead to a major adjustment in return expectations for Japanese stocks during the year," Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte in Singapore, wrote in a report.