Quarter-end plunge, Japanese stocks have become the worst-performing market in Asia this year, what’s going on?

The Japanese stock market encountered a "Black Monday," with multiple factors indicating that pressure may continue in the short term. On Monday, the Nikkei 225 index plummeted by 4.05%, closing at 35,617.56 points, falling below the 36,000-point mark, marking the largest single-day drop since September 30, 2024, and representing the third consecutive month of decline for Japanese stocks, as well as the worst quarterly performance since March 2020. As an export-oriented economy, Japan's vulnerability has become increasingly evident against the backdrop of global trade policy uncertainty. In local currency terms, Japan has become one of the worst-performing markets in Asia this year, significantly lagging behind most other markets. According to Goldman Sachs trader Enna Hattori's analysis, factors such as the lack of corporate buyback support, capital flows at the end of the quarter/fiscal year, and a shift in CTA strategies from buying to selling have all contributed to the current decline in Japanese stocks. Driving Factors Behind the Plunge According to Hattori's analysis, the current decline is primarily driven by industries sensitive to tariff policies, including technology and automotive sectors. At the same time, previously well-performing banking and trading company sectors have also been severely impacted, reflecting investors' growing concerns about global growth and economic recession across Asia. It is noteworthy that yesterday marked the last day of the "buyback ban period" for Japanese stocks, which means the market lacks support from corporate buybacks. Prior to the ban period, companies were net buying approximately 500 billion yen (about $3.35 billion) worth of stocks each week, equivalent to about $670 million per day, accounting for approximately 2% of the average trading value of the Tokyo Stock Exchange index. Although the Nikkei index has fallen to oversold levels (RSI below 30), Goldman Sachs pointed out that currently only 1% of the stocks in the Tokyo Stock Exchange index show oversold signals, far below the 84% and 26.5% seen during the last two significant declines in August and September 2024, indicating that the market may not have reached its bottom yet. Momentum indicators are also at concerning highs. Goldman Sachs' momentum indicators continue to trade near historical peak levels, and historical experience suggests that this typically leads to mean reversion in the form of momentum reversal, resulting in significant price declines. Short-term Support for Japanese Stocks, Goldman Sachs Remains Cautious However, not all factors are pessimistic. Goldman Sachs stated that from a seasonal perspective, with the arrival of April and May (which coincides with the peak season for fiscal year performance announcements and buyback announcements), the Nikkei index may receive some support. Additionally, with the end of the "buyback ban period," corporate buybacks will gradually resume, and in 5 out of 6 scenarios, CTA strategies are also expected to support the Japanese stock market in the coming week and month. Nevertheless, Goldman Sachs' Dani Wojdyla remains cautious about the short-term outlook for the Japanese stock market. Wojdyla believes that the tariff policy to be announced on April 2 may exert further pressure on the market, maintaining a cautious stance on the short-term outlook for Japanese stocks: "Non-U.S. assets may be more susceptible to tariff policies than recently... Given Japan's net export nature, it is generally more sensitive to tariff news." According to Wojdyla, while the earnings report is expected in mid-April, the continued recovery of repurchase announcements and third-quarter performance momentum may provide some positive factors. However, given the uncertainty of tariff impacts, corporate forward guidance may still remain cautious—it is expected that tariffs on automobiles and key imported goods could lead to a 2%-7% decline in Tokyo Stock Exchange EPS.