"You can't hold the exporters because of the currency, you can't hold basic cyclicals because the economy is weak, and you can't hold the financials if all the banks are bust," said Scott McGlashan, director of Perpetual in the UK. "I think there's only one direction for the market short term and that's south."
The benchmark Nikkei stock average fell 2.59 per cent last week to close at 12,879.97, its lowest level since the end of 1985. But it could fall to 11,000 by the end of this month, according to Mr McGlashan.
Stocks are likely to continue to be pummelled by currency swings. The dollar plunged nearly 20 yen from Wednesday morning in Tokyo, as hedge funds sold dollars to pay back yen loans. From an eight-year high of 147.66 on August 11, the dollar fell more than 24 per cent to Thursday's low of 111.58.
Japanese government bonds are likely to be little changed, as the dollar's weakness could be offset by an auction of 20-year government bonds. "A weaker dollar is definitely a plus, but people may sell 20-year bonds to take profits amid confusion of markets," said Jun Fukashiro, fund manager at NCB Investment Management.
Last week, the benchmark government bond yield rose 7.5 basis points to 0.790 per cent. Continued dollar weakness will probably lead to further shares selling in the top exporters, which will see profits crumple as the yen strengthens. "Investors are at a loss as to what to do," said Dhia Amir, senior institutional sales trader at Nomura Securities. "They're at a loss as to where to pinpoint the downside for the dollar, or the downside for Japanese equities."
Foreigners, who are large owners of these exporters - holding 44.9 per cent of Sony and 41.7 per cent of Rohm's shares - are likely to be further inspired to sell. Still, the market could rebound if legislation to rebuild the capital of solvent banks passes the Diet before the end of this session, next Friday.
Moreover, public pension funds could help support the market to try to pull the benchmark back from the brink. "It could cushion the decline against the possibility of a crash," said Nomura's Mr Amir.Reuse content