Nikkei swoons as investors cut hedges against weaker yen

Thu Jun 13, 2013 4:19am EDT

* Stocks, yen touch levels not seen since April 4
    * Japan govt says need to watch stock market moves calmly
    * Japanese were net sellers of foreign bonds, stocks last
week

    By Lisa Twaronite
    TOKYO, June 13 (Reuters) - The Nikkei stock average and the
dollar skidded to lows on Thursday not seen since the day the
Bank of Japan unveiled its massive monetary policy overhaul, as
investors cut their long Japanese stocks and short yen
positions.
    In a chicken-egg scenario, weakening Japanese equities
prices have pushed up the yen over the past two weeks, as
foreign investors have unwound the hedges they put in place to
shield themselves from a weaker yen when the currency was on the
way down. 
    "It's not that easing led to higher stocks; it was
expectations that raised stocks," said Koji Fukaya, chief
executive officer and foreign-exchange strategist at FPG
Securities Co. in Tokyo. 
     "There are a lot of people who had a trade in place that
was for higher stocks, selling yen. Now they're just turning
that around," he said.
    The Nikkei ended down 6.4 percent at 12,445.38 on
Thursday after dropping as low as 12,415.85 in morning trade.
The intraday low brought it within about 50 points of its
closing level on April 3, the day before the BOJ stunned
investors with its plan to double the monetary base in two years
to wrest the country out of deflation.
    Some strategists and market participants had expected the
BOJ's massive easing would send Japanese investors in search of
higher yields abroad, adding to pressure on the yen.
    But that allocation shift has not yet materialized. Finance
ministry data on Thursday showed Japanese investors were net
sellers of foreign bonds and stocks for the fourth consecutive
week, as they continued to repatriate proceeds from overseas
investments. 
    The dollar skidded as low as 93.75 yen on Thursday, also its
lowest since April 4, down more than 2 percent on the day and
well below its 4-1/2 year high of 103.74 yen struck on May 22.
    That weaker yen helped lift shares of exporters, and
contributed to the Nikkei's rise to a 5-1/2 year peak on May 23,
the culmination of a rally of more than 80 percent from
mid-November.
    But then global macro funds started taking profits, against
a backdrop of concerns over slowing China growth and rising bets
that the U.S. Federal Reserve will begin to scale back its
stimulus. Investors have also been disappointed with Prime
Minister Shinzo Abe's "Abenomics" growth strategy to revive the
world's third-largest economy.
    The Nikkei has lost nearly 22 percent since hitting its
multi-year high on May 23, entering bear market territory.
    The 20-day rolling correlation between the dollar/yen and
the Nikkei reached 0.869 on Thursday, down from a seven-week
high of 0.925 hit on June 5. A reading of one would indicate
exact correlation.
    The Nikkei is still up 20 percent so far this year, but
investors are warily eying the downside, which could threaten
Abe's comprehensive plan to pull the country out of its
persistent deflation and foster sustainable growth.
    On Thursday, Japan's Chief Cabinet Secretary Yoshihide Suga
said it was important to watch stock market movements calmly,
seeking to defuse any concerns over the selloff. 
    But in the short term, the stock market faces a build-up of
long positions placed during its ascent from mid-November up to
the third week of May.  
    "We trace about one-third of that move. There are a lot
people looking at this level around 12,500. If it goes below
that, say 12,200, we could see a lot more people cutting their
positions and getting out of their trades," said Hong Kong-based
Guy Stear, Asian credit and equity strategist at Societe
Generale. 
    In the longer term, Stear still believes the BOJ's balance
sheet expansion will ultimately drive the yen lower against the
dollar, and the Nikkei will move back to retest this year's
highs around 16,000 in the third or fourth quarter.
    "The question is, when do you get back in? I think there are
a lot of people looking at it right now," Stear said.
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