This is definitely a major bearish factor for the Japanese stock market.
However, it remains to be seen how much impact it will have on the current Japanese market. In any case, this is a positive signal.
“What about our money?” Maxim’s first thought was not about the large amount of funds they held, but about the money they had misappropriated from investors.
While shorting the Japanese market, Jim boldly and recklessly invested the funds entrusted by investors into the futures market, hoping to make some extra profits.
In the previous week, his private funds had earned more than ten million dollars in profit, which greatly excited him. In a moment of enthusiasm, he reinvested all the profits back into the market, establishing another thousand long positions.
The fourth quarter has now ended, and the fund will soon release its new quarterly research and outlook, as well as the latest net asset value to investors.
Before preparing to return home, Jim wrote an enthusiastic thank-you letter, first thanking them for their support over the year, and then boldly announcing that he would double the fund's net asset value in the coming year.
Now it seems that this promise was made too early.
After calculating in his mind for a long time, Jim clenched his teeth and said softly, “Let’s see the reaction first. I don’t think the Japanese market will fall so easily. At worst, we can just close our positions. If investors want to redeem, let them redeem!”
Maxim, standing beside him, had a changing expression and remained silent for a long time, not knowing what he was thinking.
Jim’s calculations were clearly wrong. The Japanese market was not as strong as he imagined; in fact, it was very fragile.
On the first trading day of 1990, the Japanese market opened slightly lower than the previous trading day, and everything seemed fine. However, before the opening bell had even stopped ringing, a large number of stocks were sold, with a fierce momentum.
This was a psychological test, to gauge the market's reaction to the bearish news. If the market could absorb it, the short sellers would have to reconsider their next move. If the trading was difficult, the subsequent attacks would continue.
The result was neither good nor bad. After a period of reaction, these stocks were eventually absorbed. It could be said that both the short sellers and the buyers were testing the waters, retreating after a brief engagement.
On that day, the Japanese stock market fell 0.52%, losing 202 points, and closed at 38,712 points.
On January 5th, the second trading day, the Nikkei index continued to fall, dropping 1.13% and losing 438 points, closing at 38,274 points. During the day, it once approached 38,000 points but was stubbornly held.
On the third trading day, the downward momentum slowed, with the index fluctuating by 20 points. However, there was a hint of a counterattack from the bullish funds during the day, with the highest point exceeding 38,500 points, and it closed with a slight drop.
On the fourth trading day, the decline continued, with a drop of 343 points, a decline of 0.9%. On the fifth trading day, the opening number was the highest point of the day, and it even broke 37,500 points during the day, finally closing at 37,696 points.
Over five trading days, the market fell more than 1,200 points, a decline of more than 3% from the high of 38,957 points.
These points may seem large, but compared to the massive number of over 30,000 points in the Nikkei index, they were not significant. Analysts believed that part of it was a structural adjustment, and the other part was the digestion of bearish news. Most analysts thought that the bull market in the Japanese stock market had not ended and could still reach 40,000 points in the future.
The market quickly responded. On January 11th, the Nikkei index rebounded, gaining more than 400 points for the day. However, in the following four trading days, it fell back, quickly breaking 37,000 points and closing at 36,729 points on January 18th.
37,000 points was a turning point. Analysts generally believed that the market had fully digested the bearish news. After all, this number was nearly 2,000 points lower than the market's peak, a decline of 6%. However, this time, many of them expressed cautious optimism about the future.
In fact, the continuous decline in the stock market attracted a lot of attention. At this time, many large companies and prominent figures came out to speak, expressing strong confidence in Japan's economic future.
In January, the Nikkei Business Daily had already featured predictions from twenty famous entrepreneurs. Some of these people or those behind them were later revered as "Gods of Management," but at the time, they all expressed optimism about the Japanese stock market, even predicting that the Nikkei index would reach 42,000 to 48,000 points.
The words of these prominent figures ignited the enthusiasm of investors. From January 18th to February 16th, a period of nearly a month, the Japanese stock market indeed stabilized, fluctuating between 37,000 and 38,000 points, seemingly entering a period of continuous adjustment and oscillation.
During this time, in the Singapore Exchange, the short sellers were in high spirits. They had never seen the Japanese stock market fall every day, and they were checking their accounts for profits.
Two thousand points, converted to dollars, was 6,700 dollars per point, and 300,000 contracts meant 2 billion dollars in income. Of course, this was the ideal situation at the highest point. In fact, Jim and his team made more than 1.4 billion dollars in profit during this period. Although in the following few trading days, these profits were reduced by a third due to the rise in the Japanese stock market, they still had 1 billion dollars.
They had really let off a lot of steam!
Previously, they had been losing money, and rarely made any profits. Now, they had finally turned the tide, and almost everyone in the trading room was extremely excited.
The reason I say "almost everyone" is because of Jim. Unlike the traders who were visibly excited, he was very troubled.
His hedge fund suffered severe losses in this decline, very severe.
It should be noted that his fund was not registered with the regulatory authorities, so there were no major constraints on the use of funds, which is why he could freely allocate funds to other investment areas.
It's like a person using their own money to invest in whatever they want.
The problem was that this money was not his own. It was entrusted to him by people who trusted his network and past performance in Japan.
When making money, everything was fine, but if there were losses, those people would not care about past relationships and would likely withdraw their funds immediately.
If it were just a withdrawal of funds, it would be manageable, but these people had specified that the funds were to be invested in the Japanese stock market, not in the futures market, which was dozens of times riskier.
If these people found out that he had misappropriated the funds and invested them in the futures market, they would likely come after him.
Jim was well aware of the terrifying power of the Japanese yakuza.
Although he had timely liquidated his positions, the funds invested in the Singapore futures market still lost 20 million dollars, leaving him with less than 40 million dollars.
In just four weeks, the net asset value had risen from 50 million to 60 million and then fell to 40 million, like a roller coaster. This also affected Jim's future and destiny.
If Jim had stopped in time and returned the funds to investors, there might still have been a way out. However, after seeing the power of the futures market, he found it hard to shift his focus back to the Japanese stock market, especially with an uncertain market outlook. He decided to wait and see.
Unlike Jim, Zhong Yi had entered at the highest point, and 8,000 contracts had earned him more than 50 million dollars. Seeing the opportunity, Zhong Yi decisively liquidated all the February contracts in mid-January and then established 9,000 short positions for March, April, and even May.
He did not remember the exact trend, but he knew that the collapse of the Japanese stock market was inevitable. At this point, it was meaningless to focus on a single month's contract. Now, he just needed to follow the trend to make substantial profits.
January and February were almost over, with the Nikkei index fluctuating without much change. It seemed that the Japanese stock market would not have significant changes in the short term.
Zhong Yi returned to the mainland. His purpose in Hong Kong had been achieved, and he would just need to have Andrew liquidate all the futures contracts at the appropriate time, which would only take a phone call.
At this point, Andrew was almost worshiping Zhong Yi. The Nikkei index was developing exactly as Zhong Yi had predicted. Although he did not understand why Zhong Yi did not take profits, he obediently followed the strategy left by Zhong Yi.
Days passed, and in the last few trading days of February, it seemed that the Japanese stock market would continue to be uneventful. Suddenly, a message came from nowhere: the Chicago Mercantile Exchange would soon launch Nikkei 225 futures. (Apologies, I couldn't find the exact launch date, so let's assume it was at this point.)
The news caused a stir in the market.
With the Singapore and Osaka exchanges already in place, the launch of Nikkei index futures by the Chicago Mercantile Exchange clearly aimed to pressure the Japanese market.
Looking at the history of capital markets, every time a stock index futures contract was launched, the corresponding market experienced a significant decline. This was true for the U.S. and Hong Kong, and it would not be an exception for Japan.
Why was this the case? It comes down to the market. Generally, the main factor supporting stock price increases or decreases is investor confidence. After all, not everyone is a value investor.
Although the market provides mechanisms for short selling, such as margin trading, these mechanisms have various restrictions and cannot fully leverage the short-selling mechanism.
For example, if an investor wants to short a popular stock, they need to borrow shares from a broker. However, popular and rapidly rising stocks are hard to come by in the market, making it difficult for short sellers to short.
Futures, on the other hand, are based on an index, not a physical asset, and do not require borrowing. They are closely tied to overall market confidence and are complementary to the stock market. When the stock market rises, futures rise, and when the stock market falls, futures fall. In one sense, they are a catalyst, and in another, they are a roadmap.