Trade War Looms Over Japanese Stocks as Topix Nears Bear Market

November 13, 2018 Updated: November 13, 2018

Another day, another big drop for Japanese stocks, as the Topix index moves closer to a bear market. And under the hood, the influence of the U.S.-China trade war looms large.

With its 2 percent decline on Nov. 13, the Topix is down almost 15 percent from its 26-year high on Jan. 23. The companies that have been leading losses include carmakers, factory-automation providers and machinery manufacturers, all of which are exposed to the tariff fight in different ways.

The conflict over trade has been hurting Japanese stocks as the market continues a seemingly inexorable downward trajectory since January, with any attempts to break the trend being quickly foiled as the market lurches lower. This is coming with higher volatility and an increase in days where the market tumbles.

“At the bottom of this lies deeply rooted uncertainty overgrowth due to what’s happening to U.S. trade policies,” said Toshihiko Matsuno, who works in investment research and services at SMBC Nikko Securities Inc. in Tokyo.

The list of the biggest contributors to the Topix’s decline since January includes carmakers Toyota Motor Corp. and Honda Motor Co. Honda, for instance, has fallen more than 20 percent. Automakers’ profits are hurt, for example, by increased tariffs on materials that they import to the U.S. from China.

“For companies that have high exposure to China, it’s very likely that the wariness over the U.S.-China trade war has been reflected,” said Ayako Sera, a strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo.

Then there’s the prospect of U.S. trade policies targeting Japan itself. Though the U.S. is focused on China at the moment, “Japan isn’t in a situation where it can just relax,” Sera said. “Especially for automakers. If the U.S. puts some sort of restriction on Japanese autos, that’ll be a minus for the local economy.”

(Sera also noted that the trade war could benefit Japanese manufacturers if they make up for sales lost by Chinese firms.)

The list of losers also includes Fanuc Corp. and Keyence Corp., which make automation devices for Chinese factories. Both companies, often stock market darlings in better times, have lost at least 17 percent since Jan. 23. Then there’s machinery maker Komatsu Ltd., which has plunged almost 30 percent.

“The biggest reason behind the weakness is the U.S.-China trade war, and the fight that’s going on between them,” said Kazuyuki Terao, chief investment officer for the Japan arm of Allianz Global Investors. “If there’s some positive development during the Trump-Xi summit this month, the market could attempt a rebound, but it’s not something that could be resolved easy.”

The prolonged sell-off in Japanese stocks has come even as valuations dropped last month to the lowest since 2016, when measured by price to estimated earnings. Not even a weakening yen—it’s fallen more than 3 percent against the dollar since Jan. 23 —can stop the slide.

Broad Sell-Off

In fact, some 857 of the Topix’s 2,106 companies have fallen more than 20 percent since the January high. For the Nikkei 225 Stock Average of blue-chip firms, almost 100 companies have declined that much.

But the plunge is making some commentators see opportunities. Take Goldman Sachs Group Inc., which expects gains in Japanese industrial shares with exposure to China.

“We forecast a tactical rebound in industrial stocks on compelling valuation and stabilizing outlook,” Goldman strategists including Kazunori Tatebe wrote in a note dated Nov. 12. “While there is risk of further earnings erosion, industrial stocks have declined sharply year to date, leaving them looking undervalued.”

Still, for Allianz’s Terao, it remains too early to become optimistic. There’s a possibility Japanese stocks will fall into a bear market, he says. He’s worried about a double whammy in which the U.S. economy slows along with that of China.

What’s important for Japanese equities is what happens between the U.S. and China, rather than what happens between the U.S. and Japan, Terao said.


By Min Jeong Lee