TOKYO -- Overseas investors are pulling funds from the Japanese stock market as China shares and oil prices plummet, creating a dearth of reliable buyers and threatening to prolong a turbulent period of correction.
Ripples from abroad
The Nikkei Stock Average slid for a sixth straight session Tuesday -- a record losing streak to start a year -- with all components except Honda Motor ending down. Stocks with strong ties to China had a particularly rough session, with Sumitomo Metal Mining falling 8% and shipper Mitsui O.S.K. Lines sinking 7%. Overseas investors unable to sell off China shares due to market restrictions there "instead sold Japanese stocks linked with" the country, Takatoshi Itoshima of Commons Asset Management said.
Standout sellers are dominating the news of late. Oil-producing nations, for example, face budget crunches as petroleum prices tumble. Investors there "are liquidating their shares for cash," Norihiro Fujito of Mitsubishi UFJ Morgan Stanley Securities said. "Hedge funds are piling on as well, deepening the market's fall."
Concerns that hedge funds' selling could swell in early 2016 have been circulating since mid-December. At that time, around 3.6 trillion yen ($30.3 billion) in cash stocks had been bought for arbitrage against stock index futures -- the highest level in around seven months. Investors engaged in arbitrage tend to sell off overpriced futures when hedge funds begin snapping them up, instead buying relatively underpriced cash stocks. A high level of buying for arbitrage thus reflects a booming futures market.
By the end of last week, arbitrage holdings looked to have subsided to around 2.5 trillion yen, compared with the less than 2 trillion yen seen after last summer's China market crash sent the Nikkei index below the 18,000 mark. Many believe that arbitrage buying is still fairly high given the stock average's current performance. "There is room for the market to decline further as more futures are sold off," Yutaka Miura of Mizuho Securities said.
Rough times ahead
Many observers predict that Japanese stocks will have trouble finding buyers as the year continues. Overseas investors sold more than they bought on the Tokyo market in 2015, and look to continue unwinding their holdings on fears of a rocky global economy. Japanese banks, insurers and other institutions also look to continue dissolving cross-shareholdings this year.
Retail investors are moving to sell off inherited stocks for cash -- a typical yearly development. Pensions, meanwhile, have largely met their target asset allocations, requiring little further stock buying. Those funds are expected to engage only in limited buying on dips going forward.
The only prospective buyers in the market look to be companies themselves and the Bank of Japan. Corporations bought 3 trillion yen in shares more than they sold last year, making them the largest buyers here. But companies typically do not reach for stock buybacks as soon as January. For now, the only reliable buyer looks to be the central bank, which purchases shares of exchange-traded funds.
The lack of viable buyers could chill investor sentiment, further hampering purchases in a vicious downward spiral. Investors seem to be bracing for a turbulent market.