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‘Sell Japan’ Trade Emerges as Fiscal Worry, China Tensions Weigh

(Bloomberg) -- Japanese stocks and government bonds extended losses on Tuesday, as sentiment cooled on concerns about a diplomatic spat between Tokyo and Beijing and fiscal health at home.

The Nikkei 225 index fell 3.2%, the biggest drop since April 9, while the yield for the 40-year government bond jumped as much as 8 basis points to 3.68%, its highest level since the securities debuted in 2007.

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“There’s rising uncertainty about government finances, as well as nerves around Japan’s relationship with China,” said Tomo Kinoshita, global market strategist at Invesco Asset Management Japan Ltd. “Overall market sentiment is worsening, and it’s fueling a ‘sell Japan’ movement,” he added.

Read: Japan Bond Rout Deepens on Fears Over Takaichi’s Fiscal Package

Longer-maturity government bonds tumbled as investor worries deepened that a coming economic package from Prime Minister Sanae Takaichi would strain the nation’s public finances.

Concerns about lofty tech valuations also weighed on Japanese stocks with AI-related stocks dragging down the Topix, with SoftBank Group losing 7.5%. Cablemakers Furukawa Electric, Sumitomo Electric and Fujikura were among the Nikkei’s worst performers, with chip-gear makers Ibiden and Shift also weak.

“Both Japan and the US are showing signs of a cycle-through in AI-driven markets,” said Naoki Fujiwara, senior fund manager at Shinkin Asset Management. With retreating expectations for US rate cuts and deteriorating China-Japan relations, the prevailing view is that the bull market has ended for now, he said.

Japanese and Chinese senior diplomats are set to meet in Beijing on Tuesday to discuss growing tensions around Prime Minister Takaichi’s recent comments on Taiwan, NHK reported.

There’s growing awareness that “the outlook isn’t all rosy,” said Hiroshi Matsumoto, a senior client portfolio manager at Pictet Asset Management Japan Ltd. Investors have looked past short-term negatives to focus on future positives during the recent rally, leading to a larger wave of profit-taking among the recent winners such as banks, he added.

Even so, this week’s risk-off mood could be lifted if Nvidia Corp. releases better-than-expected results on Wednesday, said Yutaka Miura, senior technical analyst at Mizuho Securities. He cautions that with tech stocks still hovering near all-time highs, the bar is high and any disappointment could deepen the selloff.

--With assistance from John Cheng.