Japan equities slide in March on outbreak woes

The Japanese equity market declined in March, with the TOPIX (w/dividends) falling 5.99% on-month and the Nikkei 225 (w/dividends) dropping 9.69%. Japanese stocks underwent heavy selling for much of the month amid concerns over the serious impact the coronavirus outbreak will have on the global economy. During the month, the World Health Organization declared the outbreak a pandemic, and a number of countries began implementing international travel restrictions, further depressing global economic activity. Toward the end of the month, stocks were able to pare some of their losses on expectations for measures around the world to mitigate the coronavirus impact on the economy. Nonetheless, the market ended the month in negative territory. Of the 33 Tokyo Stock Exchange sectors, six sectors rose, including Electric Power & Gas, Pulp & Paper, and Other Products, while 27 including Mining, Iron & Steel, and Marine Transportation, declined.

Exhibit 1: Major Indices (Last Month and Historic Changes)

Exhibit 1: Major Indices (Last Month and Historic Changes)

Source: Bloomberg, as of 31 March 2020

Exhibit 2: Nikkei 225

Exhibit 2: Nikkei 225

Source: Bloomberg, as of 31 March 2020

“Corona shock” and the Global Financial Crisis

At the beginning of the year, the coronavirus outbreak was expected to mainly impact the economy through a supply-side shock as the epidemic shut down factories in China, the world’s most important producer. But when the epidemic turned into a pandemic spanning the globe, markets quickly realised that the virus would also cause a demand-side shock as many governments imposed restrictions on the movement of people. The economic picture has now become much graver than initially anticipated. Reaction by the Bank of Japan has been swift and a series of easing measures have been enacted. But these emergency steps will not be effective unless they are coupled with fiscal stimulus packages that address the demand-side shock the government inadvertently created with the restrictions it imposed.

Demand-side issues make the “corona shock” distinctly different from the Global Financial Crisis triggered by the collapse of Lehman Brothers in 2008. The Lehman crisis can be traced back to troubles in the financial sector that eventually caused a demand-side shock. The sequence of the corona shock is the opposite: government restrictions are creating the demand-side shock and the focus is on whether financial institutions can withstand the crisis. In our view the equity market has not fully priced in a Lehman crisis-sized shock yet. But the ultimate impact of the coronavirus pandemic will likely depend on when the government can bring the outbreak under control.

Olympics: Better late than never

On 24 March, it was announced that the 2020 Tokyo summer Olympics would be postponed in the wake of the coronavirus pandemic. The economic impact from the postponement is likely to be limited, in our view. This is because the negative impact of the pandemic has been so significant to begin with; as such, any decrease in inbound tourism as a result of the government postponing the summer games in Tokyo will not likely make a big difference as the economy is already under severe pressure. And a delay is better than a cancellation as demand lost by the postponement will be added back when the games are staged next year.

Rather than the Olympics, the focal point remains squarely on the corona shock. On 7 April, the government declared a state of emergency in Japan’s major metropolitan areas including Tokyo and Osaka. It also unveiled a massive stimulus package to mitigate the negative impact on the economy. The markets want the fiscal stimulus package to be effective in alleviating pain caused by shocks to the demand side.

Exhibit 3: Major Market Indices

TOPIX
TOPIX

JGB Yield
JGB Yield

USD/JPY
USD/JPY

Japan Equity Net Purchase from Overseas (JPY billions)
Japan Equity Net Purchase from Overseas (JPY billions)

Source: Bloomberg, as of 31 March 2020

Exhibit 4: Major Index Performance, Indicators, and Valuation

 Exhibit 4: Major Index Performance, Indicators, and Valuation

Source: Bloomberg, as of 31 March 2020
(e) stands for consensus estimates by Bloomberg.
Turnover and market cap in JPY trillions.
Net Purchase (JPY billions) from overseas is cumulative monthly.