The Nikkei 225 finished its worst trading week since March 2011 on Friday as stocks sank to six-month lows, with analysts highlighting a change in sentiment towards Japan's benchmark index.
Stocks slipped 2.38 percent on Friday, dropping below 14,000 points for the first time since October. On Wednesday the blue-chip index lost 2.1 percent with hefty gains also seen earlier in the week. With a weekly fall of 7.33 percent it was the worst trading week since the nuclear disaster at Fukushima in 2011 which followed an earthquake and tsunami on the east coast of the country.
The losses were accentuated by a selloff in momentum stocks on the other side of the Pacific Ocean. Momentum stocks are fast-rising stocks which can unexpectedly reverse when investors fear they have overshot and a bubble is brewing. In the U.S. on Thursday, high-flying technology and biotech shares led the declines as the Nasdaq Composite posted its worst session in more than two years.
"Momentum stocks around the world have been getting crushed. It's already a deep bear market," John Vail, the chief global strategist at Nikko Asset Management told CNBC Friday. "(The Nikkei) has been sold off tremendously. Foreigners in particular have become quite unenamored with the reform effort here."
This technology selloff spilled over into Japan with telecom Softbank crumbling 3.8 percent. E-commerce firm Rakuten eased 2.23 percent and Panasonic lost 1.2 percent. Index heavyweight Fast Retailing also tanked nearly 8 percent after lowering its annual full-year profit forecast late on Thursday, citing higher costs and weak demand.
As usual it was cash that saw a boost with investors fleeing to so-called "safe-haven" assets. The rose to a three-week high against the greenback at $101.3 which further weighed on exporters in Japan, with goods likely to get more expensive for potential overseas buyers.
Vail added that he expects the Nikkei to return to a "normal" stock market where earnings drive up stock prices instead of macro considerations like policy from the Bank of Japan or reform efforts by the Japanese government. Beat Wittmann, the CEO of TCMG Asset Management agreed, saying returns in the Japanese equity markets be driven by earnings in the future. He did not expect much in the way of reforms beyond changes to some fiscal policies.
The Bank of Japan has undertaken an extensive monetary stimulus program that began in earnest in late 2012. The Nikkei was one of the biggest gainers in world stock markets last year as liquidity was pumped into the economy in the hope of combating the stagnation that has plagued the country for several decades.
Prime Minister Shinzo Abe received many plaudits at this year's World Economic Forum in Davos with his defiant speech on the reform process that the country was set to undergo. However, a consumption tax which came into effect at the start of April raised a few eyebrows and had echoes of a similar move back in 1997 which led to an economic slowdown.
In a note on Friday, ING's Chief International Economist Rob Carnell said he had a "bad feeling" about Japan and has revised down growth figures for the country once again.
He added that it was surprising that the BoJ had only pre-empted the consumption tax hike with some "fairly modest" funding for lending type measures rather than any more aggressive quantitative easing (QE). However, after no policy change this week by the BoJ he expects it to accelerate QE soon.