Will Japan Stocks Keep Selling Off After Worst Day in 8 Years?
Watch the direction of this indicator more than chip stocks for clues to the Nikkei’s future.
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Japanese stocks plunged on Thursday, with chip stocks leading the largest one-day drop in eight years for the blue-chip Nikkei 225 index.
Today’s selling is heaviest in Japan. But in Hong Kong, the Hang Seng ended down 1.8%, and South Korea’s Kospi fell 1.7%.
In Tokyo, the Nikkei, which has been setting all-time records this year, fell 3.3%, its emphasis on large-cap multinationals weighing it down.
It has now shed 10.3% since closing at an all-time high on July 11, 2024, an advance that, as I noted at the time, is healthier and broader-based than the narrow gains in U.S. stocks.
The broad-market Topix, which tracks the Tokyo market as a whole, fell 3.0% today. Its highs have not been as high as the Nikkei, and its lows are now not as low.
The selling is heaviest in tech names, with chip-testing equipment maker Advantest ATEYY (T:6857) plunging 6.0% on Thursday. Tokyo Electron TOELY (T:8035), which makes tools to make semiconductors, lost 4.8% today.
The top loser among the 225 Nikkei index stocks is Renesas Electronics RNECY (T:6723), down a whopping 13.6% on Thursday. That’s its largest decline in more than 15 years, after the chipmaker, which supplies major car companies, missed analyst forecasts for its earnings. It is now barely in the black for the year, up 3.6%.
“We were too optimistic in our outlook for the first quarter,” CEO Hidetoshi Shibata said on Thursday at a press conference. It now expects sales of its chips to fall this quarter, but to correct later this year.
Tech investor Softbank Group SFTBY (T:9984) is another major decliner, down 9.4% today. The venture-capital company got disappointing news from its investment in Ola Electric in India, with word today that it is suspending work on an electric car to focus on e-scooters.
Softbank also owns 89.8% of the chip designer Arm Holdings ARM, which is down 7.7% since Tuesday's Wall Street close. Softbank is still posting a net 54.8% advance in 2024, but its shares plummeted 21.4% since its all-time peak on July 11, 2024. They had taken 24 years to reset a record high Softbank posted in February 2000.
The Japanese yen strengthened dramatically today, and has now moved from ¥161.94 to the U.S. dollar in the middle of July to ¥152.60 today.
The weakness of the currency has been helping the profit prospects of Japanese companies that make their money overseas, such as Toyota Motor TM (T:7203) and Honda Motor HMC (T:7267), with their large U.S. manufacturing presence. Renesas is a major supplier to both automakers.
Honda fell 2.8% on Thursday trade in Japan, following through on Wednesday’s 3.2% loss on Wall Street. Toyota shed 2.6%, steeper than its 1.8% correction in U.S. trade. Since a peak on July 4, 2024, they’ve both experienced double-digit falls, Honda now down 11.5% since then, and Toyota off 10.9%.
Interestingly, the pre-market signs are that the U.S.-traded ADRs will post slight gains on Thursday at the open. So, the market clearly feels the Tokyo trade is just reflecting what went on for Wednesday’s Wall Street correction.
How long will the correction in Japan, now into its second week, last?
Traders say some of today’s Nikkei losses were programmed trades on futures by commodity trading advisors (CTAs), who began unloading positions after the Nikkei broke long positions through the 40,000 barrier. It fell back below that level on Monday. It had taken 34 years for the Nikkei to rise above its bubble-era closing high of 38,915.87, set in 1989. Having peaked at 42,224.02 on July 11, 2024, it now stands at 37,869.51.
I anticipate that the direction of the yen will be more important than the temporary correction in chip stocks. With the U.S. Federal Reserve preparing to cut interest rates with its next change, the peak and then start of the decline in Japanese stocks coincides exactly with weaker-than-expected U.S. inflation numbers released July 11, 2024.
The central Bank of Japan (BOJ), meanwhile, is likely to tighten monetary policy in its next move. It next meets on rates on July 30, 2024, and July 31, 2024, in other words: Tuesday and Wednesday of next week.
The BOJ is sure to be weighing whether to raise rates at that meeting, having tinkered with its yield-curve control this time last year, its firs adjustment to its super easy monetary policy. The BOJ followed that by raising rates a tiny amount in March 2024, the first hike in 17 years, as I noted at the time.
With chip companies worldwide selling off, we can expect a significant correction in Taiwan’s stock market. But trading was called off today for a second straight day due to a super typhoon sweeping the island, lashing it with high winds carrying massive amounts of rain.
As of Tuesday’s close, Taiwan stocks are the top performers in Asia, with the Taiex up a startling 34.3%. Around half the market’s capitalization is now in market-leading chip foundry Taiwan Semiconductor Manufacturing Co. TSM (TW:2330), which fell 5.1% on Wednesday on Wall Street.
TSMC also peaked on July 11, 2024, and had been sitting on a 82.1% gain for the year at its all-time high. It is now “only” up 57.4% in 2024. Where TSMC goes, we can expect Taiwan stocks as a whole to follow. So, expect heavy pressure on the Taiex when trading resumes.
