Volatility in the Japanese markets is taking its toll both on traders’ nerves and their sleeping routines. Volatility isn’t a bad thing, of course. For bulls and bears alike, rollercoaster markets in Japan represent excellent buying and selling opportunities.

Japanese Markets

Making the most of these opportunities, however, means being at your computer when the markets open and close. Unfortunately, for western traders, the Japanese markets are open during the night when most 9-to-5 workers are in bed.

A Wake-Up Call For The Japanese Markets

Looking at the background conditions, it’s hardly surprising that the Nikkei (.Nikkei Indices:NI225) is currently so agitated. Investors are worried that Japan may not be able to keep servicing its huge public debt. Flows into Japan’s equity funds have plummeted in the last few weeks as seen in the chart below. Yields on benchmark 10-year government bonds spiked in May as prices of those bonds slumped, bringing about the end of the spectacular rally since the beginning of the year.

Flow into Japan equity funds

The situation isn’t helped by the fact that the US seems to be talking down its commitment to stimulus and will taper off quantitative easing sooner rather than later.

Industry experts, such as Patrick Hejlik, CEO of Fourth Quadrant Asset Management LLC, are unsurprised by the recent volatility, but optimistic about the future:

‘Recent weakness in the Nikkei has been relatively easy to see and totally necessary given the almost parabolic move since last year. It was simply too far and too fast and we have recently pared back our overweight to the region by 10% given this move. However, we think it will stabilise and then move forward.’

Not only are the equities volatile, but the yen has also undergone repeated swings on both sides, adding further to the market’s mayhem. Most of yen movement in the past weeks has been driven by the strength of USD, due in part to the Fed’s June 19 comments.

Japanese Markets Remain Resolute

Meanwhile, decision-makers at The Bank of Japan have dismissed market volatility as they focus their efforts on tackling deflation. Despite scepticism from within its own ranks, bank officials unanimously voted to stick to current policies and grow its cash and deposit reserves.

The bank’s new governor, Haruhiko Kuroda, said the bank had decided against fresh action, stating that volatility was being successfully managed by conducting more frequent transactions in lower amounts:

‘We continue to be wary of movements in long term interest rates, especially undesirable spikes in volatility, and will keep up efforts to reduce that volatility, but the economy is on a solid path to recovery, and I expect financial markets to soon reflect that and regain composure.’

The market, however, remained unconvinced and the Nikkei slumped.

Japanese Markets – More Sleepless Nights Ahead

All in all, not good news for sleep deprived traders working through the night in order to protect their Japanese investments. In terms of volumes, trading on the Tokyo Stock Exchange has hit record levels and shows no sign of abating. Which means that when traders aren’t at their desks, more likely they are burning the midnight oil at home squinting bleary-eyed at rapidly fluctuating share prices.

As a manager at Davys Stockbrokers in Dublin commented, the most critical time is just as the Japanese markets open:

‘There’s a lot of competition among staff here and I’m seeing a lot of our junior traders coming in red-eyed in the morning. And it’s not the result of celebrating a big gain the day before. They don’t have the experience of more senior staff, who stay up perhaps just for the first two hours of trading in Tokyo, when volatility is at its highest, and then get to bed around 2am GMT.’

The question is how long traders can continue to burn the midnight oil without their work suffering as a result of fatigue?

‘Well, this is it. We wouldn’t expect to have any problems in the short term, but it’s only a matter of time before tired traders lose more than just sleep over Japanese market volatility. For most of our staff, the end to the current volatility will be a godsend.’