Japan stocks drop as chip news spur profit-taking after rally

A RALLY that propelled Japanese stocks to the highest level in nearly 33 years abruptly halted on Tuesday (May 23) after news about restrictions on chip-technology exports spurred profit taking. 

The Topix fell as much as 0.9 per cent, erasing an earlier 0.6 per cent gain. A gauge of electronics shares was the biggest drag after the trade ministry said the previously announced chip rules would take effect on Jul 23. The blue-chip Nikkei 225 Stock Average also reversed gains, snapping an eight-day rally.

“The news about stricter chip equipment export controls was likely the trigger to unwind the supply and demand” in the market, said Masayuki Otani, chief market strategist at Securities Japan. “Since companies’ earnings outlooks for this fiscal year have been factored in to some extent, the impact is not likely to be that great.”

Japanese equities are among the world’s best performers this year, with the Nikkei 225 up about 19 per cent, helped by continued easy-money policy, corporate reforms and inflows of funds from foreign investors. Technical signals have flashed signs over overheating while valuations are still seen as reasonable by some observers.

The 14-day relative strength index on the Nikkei 225 reached 84 on Monday, hitting the highest since November 2017 and exceeding levels seen as overbought by traders.

“Given that the Nikkei had risen more than 2,000 yen in nine business days including today, there is probably some profit-taking selling occurring, as would be expected” said Rina Oshimo, a senior strategist at Okasan Securities. BLOOMBERG