Nikkei 225 Plummets 4% as Tariffs, Buybacks, and Fund Flows Drive Market Decline

Japan's stock market experienced a significant decline at the end of the quarter, making it the worst-performing market in Asia for the year. The Nikkei 225 index plummeted by over 4%, marking the largest single-day drop since September 2023. This decline was driven by multiple factors, including sensitivity to tariff policies in sectors such as technology and automotive, the absence of corporate buybacks, quarter-end and year-end fund flows, and the shift in CTA strategies towards selling.

The sensitivity of certain sectors to tariff policies played a crucial role in the market's performance. The technology and automotive sectors, which are heavily reliant on global trade, were particularly affected by the uncertainty surrounding tariff policies. This uncertainty led to a sell-off in these sectors, contributing to the overall decline in the Japanese stock market. Additionally, sectors that had previously performed well, such as banking and trading companies, also experienced significant losses, reflecting growing concerns about global economic growth and potential recession across Asia.

The lack of corporate buybacks exacerbated the situation. Typically, companies use buybacks to support their stock prices, but the absence of this support during the quarter-end period allowed the market to decline further. The shift in CTA strategies towards selling also played a role. CTAs often use algorithmic trading strategies that can amplify market movements, and their shift towards selling added to the downward pressure on the market.

The end-of-quarter and end-of-fiscal-year fund flows also contributed to the decline. During these periods, institutional investors often rebalance their portfolios, which can lead to increased selling pressure. This rebalancing, combined with the other factors, resulted in a significant drop in the Japanese stock market. The Nikkei 225 index closed at 35,617.56 points, breaking below the 36,000-point mark for the first time since September 2023. This marked the third consecutive month of decline for the index and the worst quarterly performance since March 2020.

Despite the significant decline, there are some factors that could provide short-term support for the Japanese stock market. From a seasonal perspective, the approach of April and May, which are typically the periods for fiscal year-end results and buyback announcements, could offer some relief. Additionally, the end of the "buyback restriction period" could see a resumption of corporate buybacks, and CTA strategies are expected to support the market in the coming weeks. However, analysts remain cautious about the short-term outlook due to the potential impact of tariff policies, which could further pressure the market.

Analysts warn that the upcoming announcement of tariff policies on April 2 could bring additional pressure to the market. Given Japan's net export-oriented economy, it is particularly sensitive to tariff-related news. While the release of first-quarter earnings, buyback announcements, and the continuation of the third-quarter earnings momentum could provide some positive factors, the uncertainty surrounding tariffs may lead companies to maintain a cautious outlook. This could result in a 2% to 7% decrease in the earnings per share (EPS) of the Tokyo Stock Exchange (TSE) due to potential tariffs on automobiles and key imported goods.