Barefoot Investor: Japanese Stocks Decline on Growing Signs of Banking System Instability

Japanese stocks fell amid signs of growing instability in the global financial system after the Federal Reserve said there are “significant downside risks” to the U.S. growth outlook and Europe’s risk watchdog said threats to the region’s banks have increased “considerably.”

Mitsubishi UFJ Financial Group Inc. (8306) led declines among Japan’s biggest lenders on growing international turmoil and after BNP Paribas SA said the country’s banking industry is “deteriorating.” Honda Motor Co., Japan’s second-largest carmaker, slid 4.6 percent. Softbank Corp. (9984) plunged 11 percent after a report the carrier will lose its position as the exclusive provider of Apple Inc.’s iPhone in Japan.

The Nikkei 225 (NKY) Stock Average lost 2.2 percent to 8,552.02 at 12:38 p.m. in Tokyo after investors were disappointed by a Fed plan to support growth in the world’s biggest economy by buying $400 billion of longer-term debt. The broader Topix index dropped 2 percent to 741.77, heading for the biggest drop since Aug. 19. Japan’s stock market will be closed tomorrow for a public holiday.

“The market had priced in the Fed’s plan,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third-largest bank by market value. “It won’t boost the economy much, while it may have a negative impact on earnings of financial institutions.”

‘No Surprises’

The Standard & Poor’s 500 Index slid 2.9 percent yesterday in New York, the biggest drop since Aug. 18, after the Fed announced a widely anticipated policy that investors dubbed “Operation Twist” because it’s designed to flatten the yield- curve to stimulate borrowing and investment. Financial shares plunged after Moody’s Investors Service cut its credit ratings for three major U.S. banks. Futures on the S&P 500 slipped 0.7 percent today.

“The Fed delivered no surprises, leaving markets facing sovereign-debt issues in Europe to which there is still no clear solution,” said Angus Gluskie, who manages more than $300 million at White Funds Management in Sydney. “Under the surface, we are moving quickly into a secondary credit crisis.”

The Topix has lost about 18 percent this year amid concern U.S. growth is sputtering and Europe’s debt crisis will damage the banking system, damping demand in two of Japan’s biggest export markets. The decline has cut the price of shares on the index to 0.89 times estimated book value, near the lowest since March 2009.
Risks Increase

The European Systemic Risk Board urged swift action from policy makers to tackle threats to the financial system that have increased “considerably” as the region’s sovereign debt crisis pressures banks.

“Key risks stem from potential further adverse feedback effects between sovereign risks, funding vulnerabilities within the European Union banking sector, and a weakening of growth outlooks both at global and EU levels,” the ESRB, Europe’s risk watchdog, said in a statement late yesterday. “Decisive and swift action is required from all authorities.”

Japanese lenders tumbled today after BNP Paribas initiated coverage on seven of the country’s largest banks, saying they have little chance of improving profitability.

Mitsubishi UFJ, the country’s biggest listed bank, declined 2.4 percent to 329 yen. Mizuho Financial Group Inc. (8411) slipped 1.8 percent to 112 yen, while Sumitomo Mitsui Financial Group Inc. (8316) dropped 2.4 percent to 2,076 yen.
‘Allowed to Fail’

Banking shares also fell in Tokyo today after Moody’s cut credit ratings for Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. The ratings service said “there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited.”

Indexes tracking makers of cars and electronics contributed the most to declines on the Topix. Honda dropped 4.6 percent to 2,259 yen. Toyota Motor Corp. (7203), the world’s biggest automaker, fell 2.1 percent. Sony Corp. (6758), Japan’s biggest exporter of consumer electronics, slid 2.3 percent to 1,477 yen.

Softbank, Japan’s sole carrier of the iPhone, slumped 11 percent to 2,323 yen, falling the most on the Nikkei, after the Nikkei Business magazine reported that KDDI Corp. (9433) will begin selling the newest model of the smartphone in the domestic market. KDDI gained 1.3 percent to 637,000 yen. (Bloomberg)


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