Shaken by Circuit Breaker and Geopolitical Risk

For the first time in its post-war history, Tokyo Stock Exchange marked consecutive declines in its average price for five days at the beginning of a year. Cerebrating new year, the market has always been rallying in the opening. This year, confusion in Shanghai market with pessimistic perspective on Chinese economy and sudden appearance of adversary between Saudi Arabia and Iran were major blows on Tokyo. Circuit breaker and geopolitical risk were working as magic spells.

Nikkei Average finished last year at ¥19,033 on December 30^th. At the first day of this year, January 4^th, it marked abrupt fall by ¥582, in spite of new year cerebration with kimono girls to attract the eyes of grown men. Unusual enough, stock price kept on declining. Nikkei Average finished the first week of this year with ¥17,697. Decline for five consecutive new year days was a new record, since the market restarted its exchange in May, 1949.

Major element against Nikkei Average was speed down of Chinese economy. With negative index of Chinese manufacture released on the morning of January 4^th, Shanghai Composite Index showed steep down, causing invocation of “circuit breaker,” a built-in system of halting exchange with excessive move of prices. Circuit breaker encouraged skepticism of investors in Tokyo on Chinese market. Although an announcement of suspension of invocation of circuit breaker in Shanghai eased other Asian markets, Tokyo kept on declining on Friday.

Saudi execution of Shi’ite cleric Nimr al-Nimr and announcement of closing diplomatic tie with Iran shocked the world market. Meanwhile, Eurasia Group released Top Risk 2016, in which Saudi Arabia was included as a geopolitical risk. Not accustomed to the wording, media began to use the word of “geopolitical risk” in explaining psychological uneasiness of the investors.

The risk was not contained in Middle East. With no expectation in any country, North Korea exercised its fourth nuclear test against United Nations Security Council resolutions. Nikkei Average marked further down on Tuesday after Korean Central News Agency announced “complete success of hydrogen bomb test.”

Slump of stock market also affected foreign exchange. Value of Japanese yen rose from ¥120 against one U.S. dollar at the last yearend to ¥118 on Friday. One opposite lawmaker accused Japanese government of its operation of government pension investment fund, which could be calculated as losing ¥4 trillion for the consecutive decline of stock price. It is true that Prime Minister Shinzo Abe’s economic policy is vulnerable to volatility in the market.