"What's frightened people is that we're getting close to the end of the fiscal year with two possible negatives: earnings [warnings] and selling by institutional investors," said Christophe Aurand, manager at Taiyo Life Gamma Asset Management.
The Nikkei index may trade this week between 13,500 and 14,300. The benchmark last week fell 4.1 per cent to 13,898.09. The Topix banks index fell 5.4 per cent last week, and lenders like Bank of Tokyo-Mitsubishi may fall further on the concern that rising yields on government bonds will cut deeper into the value of investment portfolios already undermined by a weak stock market.
The yield on the benchmark Japanese government bond last week hit a high of 2.44 per cent on signs that the central bank may underwrite more bond sales. The prospect of yields setting new records may give another reason to sell to life insurance companies and other institutions, which are under pressure to raise cash before the end of March.
"Banks are very vulnerable," said Yosuke Mitsusada, a fund manager at NCG Investment Trust Management. "They're looking at latent losses on their bond portfolios, and cross-shareholding ties are going to unwind faster the closer we get to the end of the [fiscal] year."
Still, Mitsusada and others say they expect buying by company and government pensions to keep the benchmark from falling below 13,500. With the bond and currency markets sending discouraging signals for the earnings prospects of banks and exporters, pensions may buy stock in companies like Takeda Chemical Industries, Japan's largest drug maker.
Electronics companies and other exporters will have to battle the yen. A further rise in bond yields is likely to push the Japanese currency still higher against the dollar. Hitachi announced that it will post its first ever full-year group loss because the dollar has bought an average of Y118 during the second half of the year, Y7 less than the company expected.