Japanese stocks plunge in largest rout since 1987’s Black Monday

• Japanese stocks recorded their biggest one-day drop since Black Monday in 1987.
• The Nikkei stock average fell 12.4% on Monday, its worst drop since the October 1987 crash.
• The banking sector led the decline, sending the Nikkei stock average into a bear market, dropping 27% from its July 11 high.

Japanese stocks on Monday recorded their biggest one-day crash since the 1987 Black Monday sell-off, fuelled by last week’s global sell-off, economic uncertainty and worries that investments financed by a weak yen were unwinding.

The Nikkei stock average tumbled a staggering 12.4 percent, its worst drop since the October 1987 crash, as a weak jobs report on Friday stoked fears of a possible recession and the yen rose to a seven-month high against the dollar.

Japanese bank stocks led the sell-off, sending the Nikkei stock average into a bear market, dropping 27% from its July 11 peak of 42,426.77.

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Between July 11 and Monday’s closing price of 31,458.42, the Nikkei lost $792 billion of its peak market capitalization.

“The yen’s sharp fluctuations are putting downward pressure on Japanese stocks but are also prompting the unwinding of large carry trades where investors had been using leverage to borrow in yen to buy other assets, mainly U.S. tech stocks,” said Kyle Roda, senior financial markets analyst at Capital.com in Melbourne.

“There’s essentially a massive deleveraging going on as investors sell assets to cover their losses.”

The Nikkei average fell 4,451.28 points on Monday, its biggest one-day drop on a point basis ever and surpassing the 3,836.48-point drop on Black Monday, Oct. 20, 1987, when a global stock market crash hit the Japanese market.

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Finance Minister Shunichi Suzuki said the government was monitoring the market with “serious concerns.”

“It’s difficult to talk about the background to the decline in stock prices,” Suzuki told reporters.

Many analysts said neither interest rate forecasts nor economic data could explain the severity of the selling pressure, but that it could also be due to a strengthening yen, which has been the base currency for billions of dollars’ worth of investment for years as short-term interest rates have fallen steadily around zero.

The yen was recently up 2.5% at 142.96 to the dollar, but has risen 14% in less than a month thanks to the Bank of Japan’s interest rate hike last week and the unwinding of yen-denominated carry trades.

“The bottom line is that not just the currency but the entire ‘value’ trade that has dominated Japanese markets for two years is unwinding,” said Richard Kay, portfolio manager at Comgest in Tokyo.

Global sales

U.S. stocks sold for a second straight session on Friday, with the Nasdaq Composite Index finding itself in correction territory after jobs data stoked fears of a recession and hopes of a big interest rate cut by the Federal Reserve in September. [.N]

U.S. stock futures fell sharply, suggesting Wall Street stocks were under fresh selling pressure.

“I think the concerns about a U.S. economic slowdown were too great, but after the Bank of Japan’s rate hike, the market decided that the domestic economy was not strong enough to justify another rate hike and became nervous,” said Tomochika Kitaoka, chief equity strategist at Nomura Securities.

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The banking sector fell 17%, making it the worst-performing sector among the Tokyo Stock Exchange’s 33-industry sub-index.

Semiconductor equipment maker Tokyo Electron fell 18.48%, the biggest drag on the Nikkei average. Fast Retailing, which owns the Uniqlo brand, fell 9.59%, while technology investment firm SoftBank Group fell 18.66%.

The Tokyo Stock Price Index fell 12.2% to 2,227.15, its lowest since mid-October, and has fallen 25% since its July 11 high, entering a bear market.