March 20, 2014 7:00 pm JST

Volatility keeps retail investors away from Japan stocks

MASATAKA MAEDA, Nikkei senior staff writer

TOKYO -- Since the beginning of this year, the Tokyo stock market has tended to have two characteristics -- great volatility and frequent across-the-board price movements. If these trends continue, individual investors will be reluctant to buy shares.

     Because of the globalization of stock trading, equity markets around the world have a tendency to move in the same direction. But this year, daily percentage changes in the Nikkei Stock Average, the standard gauge of Japanese stocks, are sometimes more than double those of the previous day's Dow Jones Industrial Average.

     There have been 48 trading days so far this year, as of March 14. Out of these 48 days, eight of them saw very small daily movements -- less than 0.1 percent -- in the previous day's Dow Jones average. Out of the other 40 days, 20 saw the Nikkei average change more than double that of the previous day's Dow in daily trading.

     If this trend continues until the end of the year, the ratio of such "double moving days" will be 41.7 percent. This will be by far the largest in 65 years of postwar Tokyo stock market history. The ratio is calculated by dividing the number of days when the Nikkei's percentage change is more than double that of the overnight Dow by the total annual trading days.

     The previous high of this ratio was 27.4 percent, recorded in 2013. The average of this ratio in the last 10 years was 16.0 percent.

     Therefore, last year was already unusual, and this year is more unusual.

     The other tendency of this year's share price movement is the frequency of the across-the-board price movements.

     Out of 48 trading days to March 14, 20 days saw more than 80 percent of listed stocks on the first section of the Tokyo Stock Exchange move in the same direction, either up or down.

     Especially on eight days, more than 90 percent of the listed stocks went either up or down in concert.

One-way ride

The main issue is the cause of these one-way phenomena. If the Japanese capital market were small and located on the periphery, it would be understandable. But in terms of total market capitalization, the market is the third largest in the world after the New York Stock Exchange and Nasdaq.

     Many market observers argue that, if there were enough investors focusing on corporate fundamentals, the influence of algorithm traders and managed futures traders would be more neutralized.

     However, the amount of stock transactions conducted by domestic corporate investors including institutional investors is only 6.5 percent of the total turnover executed on the TSE so far this year. This ratio is far less than that of foreign investors. The share of the transaction volume by foreign investors is 61.6 percent of the total.

     The combination of heavy dependence on foreign investors and very small participation of domestic institutional investors may have created the situation in which the main driver of stock market is not corporate fundamentals but macroeconomic factors. As a result, the movement of Japanese stocks seems like that of double-bull exchange traded funds on the Dow Jones average.

     If the lack of variety and depth of the stock market is a consequence of market forces, it seems difficult to find a quick remedy. But in reality, in the two decades since the collapse of the bubble economy, many rules and regulations regarding investment activity by domestic banks and institutions have worked as disincentives to stock holdings.

     Therefore, there may be a solution to remedy the current situation. Removing the disincentives that have prompted institutional investors to reduce their exposure to the stock market may be a first step. Otherwise, the Japanese stock market will remain a risky and difficult place to invest, especially for individual long-term investors.