The Tokyo stockmarket has been much more volatile than the MSCI World index so far this year. During the first quarter the MSCI Japan index climbed 15% while the MSCI World index was only up 2% – all index figures in dollar terms. The steep climb came in March. It may partly have been caused by corporate transactions to improve balance sheets ahead of the end of the fiscal year in Japan on March 31st.
During the second quarter Tokyo has instead been one of the losers, falling 7% as of June 8th while the MSCI World index is unchanged. Such large movements increase uncertainty for investors and the market standard deviation, a popular risk measure, increases.
Foreign influence
It is hard to determine the main cause of changing share prices but many analysts point to foreign investment flows as being responsible for the high volatility on the Tokyo Exchange. During the 12-month rally from April 2003 until March 2004 large inflows from foreign investors helped to lift the Japanese stockmarket. Domestic investors were net sellers during the rally, with many of the shares coming from the unwinding of the cross-holdings that have historically dominated ownership of Japanese companies.
However, foreigners often categorise Tokyo as a high-risk market. So when the MSCI Emerging Markets index fell 20% from the middle of April until the middle of May, Tokyo was also pulled down and fell 18%. But since the middle of May the MSCI Japan index has rebounded sharply and is once again one of the best performers so far this year, with a gain of 7% as of June 8th. During the same period, both the MSCI US and the MSCI Europe indices have only risen 2%.
The yen depreciated sharply from the beginning of April until the middle of May, from 104 to 114 yen per dollar. This means that the Tokyo stockmarket did not fall as much over this period in yen terms as it did in dollars - 12% instead of 18%. These two downturns are partly related since the currency will tend to weaken if foreigners are selling both Japanese shares and yen.
Exports vital
Meanwhile, economic news in Japan has been full of encouraging signs. GDP growth has been strong in the last three quarters, unemployment is falling and deflation seems to loosening its grip. Many of these improvements are based on increased exports, especially to China, so weaker economic growth externally would probably severely damage the Japanese rebound.
