Japan stocks claw back losses after Nikkei's 7.3pc plunge on Thursday
Soaring government bonds and surprise Chinese manufacturing data sent Japan into a tailspin on Thursday, but analysts, say, the rally will resume
Bloomberg in Tokyo
The biggest drop in Japanese shares since the 2011 earthquake erased US$314 billion in market value, shaking bulls who pushed the Topix Index to five-year highs and highlighting their vulnerability to shocks at home and abroad.
This year's best performing major equity gauge plunged 6.9 per cent in record volume on Thursday after government bond yields rose to the highest levels in a year and Chinese manufacturing missed estimates. The slide triggered a halt in Osaka-traded index futures and cut the measure's advance this year to 38 per cent from 48 per cent.
JP Morgan Asset Management and Pinebridge Investments said the sell-off was overdue after US$1.2 trillion was added to equities on speculation Prime Minister Shinzo Abe and the Bank of Japan would end two decades of deflation.
The Topix traded at as much as 24.8 times earnings this week, higher than 86 per cent of days since 2004, data shows. Mark Matthews, who helps oversee US$282 billion as head of Asia research at Bank Julius Baer, said the rally will resume.
"There was a lot of froth in the market," Matthews said by phone from Singapore. "Fundamentally, this remains a compelling investment, and in hindsight, this will be a buying opportunity. The bull market won't end so quickly."
Global equities slid for a second day on Thursday amid concerns four years of unprecedented central bank stimulus would be curtailed.
The US Federal Reserve could "step down" the pace of asset purchases in the next few meetings if the labour market continues to improve, chairman Ben Bernanke told Congress on Wednesday.
Yesterday, the Nikkei 225 Index advanced 0.9 per cent, after it fell 7.3 per cent the day before. The Topix yesterday climbed back above the 1,200 level it breached for the first time in almost five years on May 10.
Shares changing hands and the value of equities traded on the first section of the Tokyo Stock Exchange reached records on Thursday. It was the first time since April 2005 that every company on the Nikkei 225 declined. About 96 per cent of the 1,709 companies on the Topix advanced this year up to Wednesday, with 97 firms, including Tokyo Electric Power, Mazda Motor and Sony more than doubling.
The sell-off came amid signs of rising speculation in Japanese equities. Options prices on the Nikkei 225 climbed to unprecedented levels relative to American shares in the days before the sell-off.
Implied volatility surged more than 80 per cent to 25.15 as of May 20, almost twice as high as in the Standard & Poor's 500 Index. Most of the increase reflected traders betting the advance would continue. Among the 10 most-owned options on the iShares MSCI Japan Index Fund, which trades in the US, eight were bullish on Monday. June and September US$12 calls had the largest open interest that day. The fund fell 6 per cent to US$11.40 in New York.
The Nikkei Volatility Index jumped 58 per cent to 43.74 on Thursday, the biggest advance since March 2011, according to data. Fifty-day volatility for the Topix climbed to 28.83, the highest since May 2011.
Speculative bets by the largest investors on the Nikkei 225 have slipped for three weeks after reaching a record in April. Net long positions among so-called non-commercial traders fell by 660 contracts to 13,781 in the week ended May 14, according to Chicago Mercantile Exchange data compiled by the Commodity Futures Trading Commission.
Japanese equities had risen "too much, too fast," especially financial stocks, former Ministry of Finance official Eisuke Sakakibara, known as "Mr Yen" for his efforts to influence exchange rates in the late 1990s, said on May 15.
Shares needed "some kind of correction" before resuming their climb, he said.
"There's no need to be perturbed as the Japanese economy is recovering soundly," Akira Amari, Japan's economy minister, said on Thursday after the 7.3 per cent drop. "We will continue to calmly proceed with pragmatic policies."
Japanese equities have soared since elections were announced in November that brought Abe to power on a platform of massive economic stimulus.