Japan’s Retail Investors Show Resiliency Despite Market Turmoil

(Bloomberg) -- Japan’s stock market rewarded retail investors for most of the year, setting fresh records and swelling their portfolios. That’s given some the confidence to remain in the market even after the crash of the last three days. 

The Nikkei 225 share average fell 12.4% on Monday, the biggest percentage fall since Black Monday in 1987. Coupled with declines from the previous two days, the market’s gains since the start of year were wiped out. Despite the plummeting value of their holdings, some small investors choose the opportunity to buy the dip, betting that the downturn was temporary. 

“I have mixed feelings about this historical decline,” said Ken Wang, a 30-year-old project manager, based in Japan. “I am both fascinated by the sharp rate of decline and curious about what is coming next. I continue to hold my positions and have also added to existing stocks in my portfolio.” 

Wang’s comments were echoed by Michael Tsuruda, an individual investor who has about half of his assets in Japanese equities, mainly in high dividend stocks. He plans to stay in the market as a long-term investor and looks to buy on dips but only after the market has stabilized.

“I think the market will return to an uptrend,” said Tsuruda. “I was thinking stock prices would fall when the Bank of Japan raises interest rates but I didn’t expect such rapid decline.” 

While some showed resiliency, the mounting losses could damp other Japanese retail investors’ risk appetite at a time when the government is trying to encourage people to shift some of their savings to investments. Japanese households poured at least 7.5 trillion yen ($52 billion) of funds into new tax-free investment account called NISA  during the first six months of this year, almost four time more than the same period last year, according to the Japan Securities Dealers Association. Shunichi Suzuki, the country’s finance minister, appealed to retail investors to stay the course with NISA. 

“We hope that investors will make a calm decision based on the importance of long-term accumulation and diversification even in the midst of market fluctuations such as market declines,” said Suzuki, following Monday’s plunge.  

While the decline was broad-based, some companies that are particular favorites of small investors were especially hard hit. Japan Tobacco Inc., a stock popular with retail investors because of its high dividend yield, plunged by the daily limit of 16.8%. Masayoshi Son’s Softbank Group Corp., another popular name among households, plunged 18.7%.

“Many retail investors had only experienced an environment of rising prices,” said Haruhiro Nakano, the president of Nakano Asset Management. “NISA coincided with a bubble in Japanese stocks due to the weak yen.”

The market rout was likely exacerbated by forced margin selling. Retail investors’ margin buying position rose to a 18-year high in late July even as the Nikkei slipped from its historic peak. Investors who have bought stocks using credit are often forced to close their positions when stock prices fall more than expected, unless they have enough extra cash for collateral to deploy.

Forced Selling

“We see what appears to be forced selling from retail investors. They seem to be damaged,” said Takatoshi Itoshima, a strategist at Pictet Asset Management. “While it is possible that we are reaching a selling climax in the near term, I cannot be sure.” 

A rapidly strengthening yen contributed to the decline in equities as it erodes the profits of Japan’s large exporters. The yen shot up more than 3% against the dollar to reach its highest level since early January. That deepened the pain for households that speculate in the currency market. 

“People who don’t have long experience in investment may have not gone through big market declines like this so the shock might be quite big,” said Masahiro Ichikawa, chief strategist at Sumitomo Mitsui DS Asset Management. “I think it will take a bit more time for the market to stabilize after such big falls.”

--With assistance from Nao Sano, Mari Kiyohara, Momoka Yokoyama and Mia Glass.

(Updates with retail investor comments.)

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