Japan stocks dive as benchmark bond yield spikes

BANGKOK (AP) -- Japanese stocks plummeted Thursday after a spike in government bond yields and unexpectedly weak Chinese manufacturing spooked investors sitting atop months of massive gains in share prices. The Nikkei 225 in Tokyo nosedived 7.3 percent to close at 14,483.98, its worst drop since the 2011 tsunami.

Japan's 10-year government bond yield rose above 1 percent for the first time in a year, unnerving financial markets at a time when Japan's already overburdened government finances are vulnerable to rises in interest rates. It later slipped back to about 0.9 percent.

The spike in long-term debt comes despite the Bank of Japan's aggressive efforts to keep interest rates down. It followed overnight news that some officials of the U.S. Federal Reserve are willing to scale back the American central bank's stimulus effort as soon as June if the economy perks up.

Chris Weston, chief market strategist at IG Markets in Melbourne, said the Nikkei has been on such a tear this year that all it took was the convergence of a few negative events to spark a sharp correction. The Nikkei, even after Thursday's fall, is up 39 percent so far this year.

"If everyone is standing on one side of the ship, it doesn't take too much to make it tip. All we needed was a cluster of negative events," he said.

Still, the sell-off is a reminder of Japan's vulnerability as Prime Minister Shinzo Abe tries to end two decades of stagnation with unprecedented monetary easing, increased government spending and reforms to make the world's No. 3 economy more competitive.

The level of Japan's debt is higher, relative to its economy, than even some of the crisis-stricken European countries. But because it is mostly owned by domestic investors, especially huge banks and insurance companies, the country's credit rating has remained steady. About a quarter of the national budget is interest payments on government debt.

Shinichi Ichikawa, chief market strategist at Credit Suisse in Tokyo, said he thought the Nikkei's drop, its sharpest since a massive earthquake shook Japan and sparked a devastating tsunami on March 11, 2011, was temporary.

"I do think Japanese stocks will continue to rise amid a growing global economy and recovery in Japanese corporate profits," Ichikawa said. "But with the strong recovery in the stock market, the incentive to carry out structural reforms is weakening. There might be a sense that nothing more has to be done."

Markets elsewhere in Asia sank sharply after a survey showed China's manufacturing contracted in May.

Hong Kong's Hang Seng slumped 2.5 percent to 22,669.68. South Korea's Kospi lost 1.2 percent to 1,969.19. Australia's S&P/ASX 200 dropped 2 percent to 5,062.40. Benchmarks in Thailand, Indonesia and the Philippines all fell sharply.

HSBC Corp. said its preliminary Purchasing Managers Index fell to a seven-month low of 49.6 in May from April's 50.4. Numbers below 50 indicate that activity is contracting. Analysts had expected a slight decline to 50.3 for the most recent month.

Recession in Europe, growth-robbing deflation in Japan and economic anemia in the U.S. have finally caught up with export-hooked China despite the government's attempts at bolstering consumption at home.

"It's no secret. The true picture is that China's export sector is slowing down and its manufacturing sector is also slowing down. That means the trade surplus is almost gone," said Francis Lun, chief economist at GE Oriental Financial Group in Hong Kong.

"The Chinese government really failed in their goal to shift the focus of the economy to consumption. It is still too heavily dependent on property and infrastructure investment," Lun said, with the country continuing to invest in big-ticket buildings and projects that stand empty while artificially boosting GDP growth.

Investors also recoiled from stocks after mixed messages by the U.S. Federal Reserve on the future of its massive bond-buying program sent Wall Street on a rollercoaster ride.

U.S. stocks shot up early Wednesday after Fed chairman Ben Bernanke told Congress that it was too soon for the central bank to pull back on its monetary stimulus. The Fed has been buying massive amounts of government bonds and keeping short-term interest rates near zero to encourage people and businesses to borrow and spend more.

The Dow ended the day lower, however, after minutes released from the Fed's latest policy meeting showed some Fed officials are willing to scale back the stimulus effort, dubbed quantitative easing or QE, as early as June if the economy picks up.

Investors have flocked to stocks because returns on bonds have dwindled due to the Fed's efforts to keep rates down. Bu the Fed minutes sowed doubt whether massive gains in stock markets will continue. There are also fears about how the economy will perform once monetary stimulus is withdrawn, another negative for stocks.

"Bernanke wants to wait and see how the data unfold before tapering back on QE. Three or four more hawkish members think they've seen enough and, absent surprises, want to get started as early as June," said analysts at DBS Bank Ltd. in Singapore.

On Wednesday, the Dow Jones industrial average fell 0.5 percent to close at 15,307.17. The Standard & Poor's 500 fell 0.8 percent to 1,655.35. The Nasdaq composite index fell 1 percent to 3,463.30.

Benchmark oil for July delivery was down 95 cents to $93.33 per barrel in electronic trading on the New York Mercantile Exchange. The contract lost $1.90 to close at $94.28 a barrel on the Nymex on Wednesday.

In currencies, the euro rose to $1.2874 from $1.2845 late Wednesday in New York. The dollar fell to 101.79 yen from 103.15 yen.

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