TOKYO -- Moody's decision to lower Japan's debt rating failed to put a dent in the Nikkei Stock Average, which continued Tuesday to set fresh highs for the year as investors maintain bullish outlooks going into the year-end.
The market is following a common saying here that warns against selling in a quiet market. "People don't see the Moody's downgrade as a big incentive [to sell]," said a trader at a major securities firm.
Investors are optimistic because they do not expect the reduction to spur mass selling of Japanese stocks, securities and currency. According to international capital-adequacy standards, sovereign bonds with an Aa rating carry no risk, while an A rating signals a 20% risk weight. Some market watchers speculated this could drive banks and other large players to unload Japanese government bonds.
But domestic banks are not taking the rate cut as an automatic incentive to sell, since the increased risk only applies to foreign financial institutions. "The risk weight is zero regardless of the rating, as long as you hold your own country's debt in your own currency," said Hidenori Suezawa at SMBC Nikko Securities.
Bids for 10-year JGBs were slow Tuesday, but the market recovered that afternoon, sending long-term bond futures to a record high.
There is also the scenario, based on past experience, that a Moody's downgrade is often followed by a market recovery. Ever since the agency first lowered its rating on JGBs in 1998, the Nikkei average has hit a ceiling around the time of an upgrade and bottomed out around the time of a downgrade. The ratings are generally considered a lagging market and economic indicator, and some even advise moving in the opposite direction to score profits.
Some also expect the ruling bloc to emerge victorious in the snap elections and continue Abenomics policies to lift the economy, which would dispel concerns about Japan's fiscal position over the mid-to-long term, further feeding optimism in the market.
But some see reason for concern. "There's no incentive to sell, but there are no enthusiastic buyers either," said Tomohiro Okawa at UBS Securities Japan.
The value of recent trades on the TSE's first section has barely cracked 2 trillion yen, a far cry from the more than 4 trillion yen right after the BOJ announced additional easing measures.
Both retail and institutional investors are holding off, and market movements are being driven mainly by hedge funds looking to boost returns through Japanese stocks. But some are now more hesitant due to the downgrade, according to a U.S. securities source.
"Investors could be relieved that the delay in the tax hike reduced the risk of an economic downturn, and are willfully ignoring the negative effects of a worse fiscal position," said Hajime Kitano at Barclays Securities Japan. This suggests a Tokyo market delicately balanced on a framework of denial.