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Olympic worries and depleted policy options stifle Japan stocks

Foreign investors turn nervous on slow government response to virus

The 2020 Summer Olympics were expected to stimulate the Japanese economy, but now the coronavirus outbreak has raised anxiety about their fate.   © Reuters

TOKYO -- As equities markets struggle around the world with the impact of the coronavirus outbreak, Japanese stocks face some special challenges: a central bank that has almost exhausted its policy options and the real, if slim, possibility that the much-anticipated Tokyo Olympics will be canceled.

The Nikkei Stock Average slid 1.2% on Tuesday to end the day at 21,082, even as benchmark indexes in China, South Korea and Indonesia rose.

"Foreign hedge funds are moving to sell Japanese stocks while considering the possibility of the worst-case scenario: the cancellation of the Tokyo Olympics," said Takeo Kamai of CLSA Securities Japan. "We could see the Nikkei average fall below 20,000."

Looking at how stocks in major markets have moved since mid-January, around when the World Health Organization first acknowledged human-to-human transmission of the coronavirus, makes the contrast clear.

China's Shanghai Composite Index fell 11% from Jan. 20 to Feb. 3 but has regained most of this ground in the month since then and is now down just 3%. The U.S. Dow Jones Industrial Average had tumbled 13% from its Jan. 17 close on Friday after a dramatic weeklong plunge, then staged a record-breaking rally Monday and ended the day down about 9% from the mid-January level.

The Nikkei average, meanwhile, has continued to slide. It ended Tuesday down 12% from Jan. 20, its lowest over that period.

Foreign investors have driven this selling. All told, 15 overseas brokerages sold 16,040 more Nikkei average futures contracts than they bought over the two trading days so far this week -- more than the net selling of 14,999 contracts for all of last week.

This comes amid net buying by major Japanese brokerages, to the tune of 15,526 contracts this week and 8,304 last week.

Japanese efforts to curb the spread of the virus are under harsh scrutiny from foreign investors.

"Singapore has identified just about all of its outbreak sources. There's concern about the slowness of Japan's response," said the CEO of an asset management firm living in the city-state, which has confirmed more than 100 cases.

With many observers believing that the worst of the outbreak is over in such Asian economies as mainland China, Hong Kong and Singapore, the alarm in Japan is giving traders reason to sell.

Monetary policy is another concern. Hoped-for monetary stimulus from central banks to shore up global equities markets is starting to materialize, with the U.S. Federal Reserve slashing interest rates by 50 basis points hours after Asian markets closed Tuesday. But the Bank of Japan, having already brought rates into negative territory, has little room to maneuver.

Analysts see the coronavirus and the government's relatively slow response potentially rattling the political stability the country has seen under Prime Minister Shinzo Abe -- a factor that had helped draw investors to Japanese markets.

About 90% of the issues on the first section of the Tokyo Stock Exchange retreated Tuesday, with such names as Nippon Telegraph & Telephone, Nissan Motor and Sumitomo Realty & Development hitting their lowest levels since the end of 2018.

Some investors see little choice but to stick to overseas-oriented companies that can benefit from demand linked to China's expected post-outbreak rebound or the advent of fifth-generation wireless technology, for example.

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