(Bloomberg):Japanese stocks hit a record high in July, and individual investors have been increasing their holdings through margin trading and the NISA (tax-free small investment system) this year amid smooth sailing in the market. However, the sudden storm has completely changed the situation in just three business days.

On the 5th, the Nikkei Stock Average continued to plummet, dropping 12%, the largest drop on a closing basis since Black Monday in October 1987. Market participants are of the view that the fall in stock prices was exacerbated by the sudden expansion of unrealized losses by individual investors who bought stocks on margin, which resulted in the obligation to post additional collateral (margin calls), which increased pressure to sell.

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“Looking at individual stocks, there are sales that appear to be from margin trading, and individual investors are hurting,” said Takatoshi Itoshima, a strategist at Pictet Japan. In the short term, it’s possible that we’re reaching the selling climax, the final stage of the selling, but there’s no confirmation yet.

Japanese stocks plummet as forced liquidation of outstanding credit purchases accelerates – likely to hit individuals hard

According to the Tokyo Stock Exchange, the credit purchase balance of individual investors increased for three consecutive weeks to 4.9809 trillion yen as of July 26. It had swelled to the highest level in 18 years due to optimism about the domestic and overseas economies and corporate performance, mainly in the technology sector. Since then, concerns have been raised about the future of the US economy due to sluggish labor-related statistics, and the Bank of Japan’s decision to raise interest rates further has raised concerns about the liquidity market, causing the Japanese stock market to collapse all at once.

If stock prices fall more than expected, margin buyers will be forced to liquidate their positions unless they can provide additional collateral. As of July 26, margin buyers’ valuation loss ratio was minus 9.4%. The performance of semiconductor-related stocks, which are popular among individuals, has been sluggish since mid-July and has fallen to its worst this year, but it is likely to worsen further. It is generally said that margin calls occur when stock prices fall below minus 10%.

In the plummeting Japanese stock market, JT, a low-beta stock that is popular for its high dividend yield and is resistant to sudden market fluctuations, temporarily fell by 700 yen (17%), hitting the limit of its limit. SoftBank Group, led by well-known CEO Masayoshi Son and with nearly 40% of its shares held by individual investors, also fell by 19%, its biggest drop to date, shocking many individual investors who had a long-term outlook for Japanese stocks to rise.

This crash is likely to affect the future of the new NISA, which has expanded its investment limit this year and has been steadily increasing its users. According to a report published by the Japan Securities Dealers Association in June, the number of NISA accounts as of the end of March was 23.23 million, up more than 8% from the end of December last year, and the amount of purchases via NISA in January-March was 6.2 trillion yen. This may also be a betrayal of the government’s hopes of accelerating the shift from savings to investment.

Nakano Haruaki, president of Nakano Asset Management, pointed out, “The combination of the new NISA and the yen’s depreciation bubble in Japanese stocks has led to many investors only experiencing an environment of rising prices.”

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Michael Tsuruta Kentaro, a private investor who manages just under half his funds in Japanese stocks, reflected on the time when the Bank of Japan raised interest rates, saying, “I thought stocks would fall some, but I didn’t think they would fall this sharply.” He reflected, “I was overly optimistic, thinking the adjustment would be small, and was overly optimistic about the market.”

Tsuruta, who wants to take a long-term view of the market, intends to continue investing, believing that prices will eventually recover. However, he said, “Rather than grabbing a knife in the air, I want to pick it up after it hits the ground,” and said he wants to wait until the confusion caused by the sudden drop has subsided before buying more.

The yen’s highest level since January

On the 5th, the yen rose by more than 3% against the dollar to 141.70 yen, the highest level in seven months since January, on the back of risk-averse yen buying due to the global stock market decline and a decline in US long-term interest rates.

The sudden rise in the value of the yen will not only push down profits in export-related sectors such as semiconductors, technology stocks, and auto stocks, but will also cause major losses for foreign exchange investors (foreign exchange margin traders) who were betting on the possibility of a weaker yen.

“Those with little investment experience have never experienced such a big drop before, so the shock may be quite large,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co. The impact of the record drop on the Japanese stock market was significant, and he said, “It will take some time for the market to stabilize.”

(Article updated to add comments from individual investors from paragraph 9 onwards)

–Interview cooperation:Nanao Sano,Mari Kiyohara.

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