Japanese stocks slide as rate concerns damp cyclical appeal

Japanese stocks were on track for their worst decline in almost four months, extending losses from late last week as hawkish comments from the U.S. Federal Reserve crushed the reflation trade that had driven the market earlier this year.

Uniqlo operator Fast Retailing Co. and chip-equipment maker Tokyo Electron Ltd. were the largest contributors to a loss in the 225-issue Nikkei average of the Tokyo Stock Exchange, which tumbled more than 3% in its fourth day of declines. Electronics and chemicals makers were the biggest drags on the broader Topix, which was down 2.5% as of 10:50 a.m., with all of its 33 industry groups in the red.

U.S. stocks and long-term Treasury yields dropped Friday on the prospect of a less accommodative U.S. monetary policy. Inflation risks may warrant the start of interest rate hikes next year, St. Louis Fed President James Bullard said in an interview on CNBC. That pointed to the possibility of an even earlier liftoff than indicated in the central bank’s comments days before.

“Yields are falling in a risk-off environment, so of course, cyclical and value stocks will be sold,” said Shogo Maekawa, a strategist at JP Morgan Asset Management in Tokyo. “If monetary tightening takes place earlier than expected, it may be bad for the business cycle in the long term, while lowering expectations over inflation.”

The benchmark Nikkei average surged 82% from its pandemic-selloff low to a 30-year high in February, as investors rushed into cyclical-heavy Japanese stocks amid expectations for economic reopenings. The blue-chip gauge has shed more than 8% since that peak amid concerns including the nation’s late vaccination drive and murky prospects for the Tokyo Olympics this summer.

“Given the Japanese markets had been lacking a domestic catalyst and been hostage to global markets, it’s no surprise to see investors taking profits or cutting losses,” said Takeo Kamai, the head of execution services at CLSA Securities Japan Co. “However, given the Nikkei was still at a multi-year high and valuations weren’t necessarily cheap, this correction may be healthy.”

Tokyo Electron has been the biggest driver of gains in the Nikkei this year amid benefits from ongoing tight semiconductor supply conditions. With the nation’s pace of vaccines finally shifting into high gear and plans for the Olympics pressing forward, investors have recently been shifting into reopening plays such as railway and retail stocks.

Given the size of the declines Monday, the market will be watching in the afternoon for any possible action by the Bank of Japan to support the market. The BOJ had helped power Japanese stocks with purchases of exchange traded funds but didn’t buy any in May, its first full-month absence from the market since the program started in 2013.