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Markets Rattled Amid Fears of Slowdown in Asia Markets Rattled Amid Fears of Slowdown in Asia
(35 minutes later)
HONG KONG — The two biggest economies in Asia showed signs of stress on Thursday, with a 7.3 percent plunge in the Japanese stock market and a surprise contraction in the manufacturing sector in China casting a shadow over the global economy. HONG KONG — A 7 percent stock market sell-off in Tokyo led to moderate declines in equity markets across Europe and Asia on Thursday, and Wall Street appeared to be headed for a weak start, amid concerns about global growth and uneasiness about the daring shock therapy Japan is employing to restart its economy after two decades of stagnation.
The data on China highlighted the fragility of a giant economy that has been an engine of global growth, while the fall in Japanese stocks underlined worries about whether the government’s efforts to reignite growth will bear fruit long-term. The stock retreat spread around the world, with European markets down around 2 percent and Wall Street futures indicating a 1 percent drop at the opening. Shares came under pressure in Asian trading after news that the manufacturing sector in China, one of the main engines of global growth in recent years, was faltering. That, and confusion in financial markets about the U.S. Federal Reserve’s intentions following testimony Wednesday by its chairman, Ben S. Bernanke, helped to further rattle investors.
The double dose of bad news highlighted that Asia – for all the promise that its fast-growing economies hold – may not be able to offset the debt and unemployment problems that beset the United States and Europe. The result was a 7.3 percent rout in the Japanese market benchmark, the Nikkei 225-stock average, and other Asian markets followed. The Hang Seng Index in Hong Kong sagged 2.5 percent, and the Sydney benchmark index fell almost 2 percent.
In China, the latest sign of flagging momentum came in the form of a closely watched manufacturing purchasing managers’ index. Released by the British bank HSBC and compiled by the research firm Markit, the index slipped from 50.4 points in April to 49.6 points in May, the first time in seven months that it came in below the level of 50, which separates expansion from contraction. The reading “pretty much dashed” hopes of a recovery in the second quarter, Yao Wei, China economist at Société Générale in Hong Kong, said in a note. In European afternoon trading, the Euro Stoxx 50 index of euro zone blue chips fell 2.0 percent, while the FTSE 100 in London was down 1.7 percent. Trading in Standard & Poor's 500 index futures pointed to a decline in New York at the opening bell. The S&P 500 fell 0.8 percent on Wednesday.
The euro ticked up 0.2 percent against the dollar, to $1.2887. The dollar fell 1.4 percent against the Japanese currency, to 101.74 yen.
China’s slowing momentum has been long in the making and is, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more gradual but more balanced pace of growth. Still, disappointments over the performance of China’s economy – the second-largest in the world after that of the United States – remain liable to unsettle markets not just in Asia but around the globe.China’s slowing momentum has been long in the making and is, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more gradual but more balanced pace of growth. Still, disappointments over the performance of China’s economy – the second-largest in the world after that of the United States – remain liable to unsettle markets not just in Asia but around the globe.
On Thursday, the Hang Seng index in Hong Kong sagged 2.5 percent, and the Straits Times in Singapore fell 1.8 percent. The markets in Australia and Taiwan both fell nearly 2 percent, and in mainland China, the Shanghai composite index dropped 1.2 percent. High hopes that the bold economic policies of Prime Minister Shinzo Abe of Japan will succeed have prompted a huge rally in stocks since November. The Japanese market is still up nearly 40 percent since the start of the year.
Stock markets in Europe also fell sharply. The DAX index in Germany and the CAC 40 in France were down 2.7 percent and 2.4 percent, respectively, by early afternoon. In London, the FTSE fell 2 percent. U.S. stocks also appeared poised for a fall, with futures on the Standard & Poor’s 500-share index down 1.2 percent.
By far the biggest drop occurred in Japan, where the Nikkei 225-share index fell more than 1,140 points, or 7.3 percent, in the space of a few hours. Market watchers said the drop appeared to have been set off by a combination of factors, among them nervousness about the dizzying speed with which the market had risen in previous months.
High hopes that the bold economic policies of Prime Minister Shinzo Abe of Japan will succeed have prompted a huge rally in stocks since November, and even after its drop on Thursday, the Nikkei was up nearly 40 percent since the start of the year.
“The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response,” he added.
Stephen Corry, chief investment strategist at LGT in Hong Kong, agreed that a combination of negative news helped spur the sell-off, among them the disappointing data from China and signs that the U.S. Federal Reserve may begin to scale back its stimulus efforts. But the Japanese market had rallied more than 14 percent this month alone, he added, and “was probably due a breather.”
Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added.Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added.
Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into a listless Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets. “The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response.”
The sell-off Thursday came in spite of economic news from Europe that was, if not good, at least better than many expected. The Markit Economics euro zone purchasing managers’ index for the manufacturing sector rose to 47.8 from 46.7, while the services index rose to 47.5 from 47.0. While a number below 50 indicates continued contraction, the improvement suggests the economy may be getting nearer to its nadir, setting up conditions for a rebound in the second half.
In Hong Kong, Stephen Corry, chief investment strategist at LGT, agreed that a combination of negative news helped spur the sell-off, including the disappointing data from China and signs that the Fed may begin to scale back its stimulus efforts. But the Japanese market had rallied more than 14 percent this month alone, he added, and “was probably due a breather.”
Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into the Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets.
One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the past few weeks have shown that the economy has begun to pick up speed.One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the past few weeks have shown that the economy has begun to pick up speed.
Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about rising interest rate burden for the government. The yield on the 10-year Japanese government bond briefly spiked above 1 percent Thursday before dropping back to 0.9 percent, but the move nevertheless spooked investors, helping produce the fall in the stock markets, said Stephen Davies, chief executive of Javelin Wealth Management in Singapore. Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about a rising interest rate burden for the government. The yield on the 10-year Japanese government bond briefly spiked above 1 percent Thursday before dropping back to 0.9 percent. The move spooked investors, helping produce the fall in the stock markets, said Stephen Davies, chief executive of Javelin Wealth Management in Singapore.
Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous. “Given the indebtedness of the Japanese government, there are worries about the impact that this could have if sustained,” Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.” Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous. Given the indebtedness of the Japanese government, there are worries about the impact that this could have if sustained,” Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.”
Mr. Yoshimoto of the Japan Research Institute also said the dramatic market moves Thursday had not changed the overall, longer-term picture for recovery in Japan. That could change if Mr. Abe fails to follow through on his promises for economic reforms, he said, “but for now, there’s no need to become overly pessimistic about Japanese shares.” Mr. Yoshimoto of the Japan Research Institute also said the sharp market moves Thursday had not changed the overall longer-term picture for recovery in Japan. That could change if Mr. Abe fails to follow through on his promises of economic reforms, he said, “but for now, there’s no need to become overly pessimistic about Japanese shares.”

Hiroko Tabuchi contributed reporting from Tokyo.

David Jolly reported from Paris.  Hiroko Tabuchi contributed reporting from Tokyo.