Japan’s stock market rewarded retail investors for most of the year, setting fresh records and swelling their portfolios. That changed in three short days. 

The Nikkei 225 share average fell 12.4% on Monday, the biggest percentage fall since Black Monday in 1987. Coupled with declines from the previous two days, the market’s gains since the start of year were wiped out. The losses came as a shock to many investors who have been betting that the country’s stock market had entered a period of sustained growth as prices and wages started to rise after many years of stagnation. A new tax-free investment account called NISA had further buoyed optimism, by funneling fresh funds into equities. 

“Many retail investors had only experienced an environment of rising prices,” said Haruhiro Nakano, the president of Nakano Asset Management. “NISA coincided with a bubble in Japanese stocks due to the weak yen.”

While the decline was broad-based, some companies that are particular favorites of small investors were especially hard hit. Japan Tobacco Inc., a stock popular with retail investors because of its high dividend yield, plunged by the daily limit of 16.8%. Masayoshi Son’s Softbank Group Corp., another popular name among households, plunged 18.7%.

The mounting losses could damp Japanese retail investors’ risk appetite at a time the government is trying to encourage people to shift some of their savings to investments. Japanese households poured at least 7.5 trillion yen ($53 billion) of funds into NISA accounts during the first six months of this year, almost four time more than the same period last year, according to the Japan Securities Dealers Association. 

The market rout was likely exacerbated by forced margin selling. Retail investors’ margin buying position rose to a 18-year high in late July even as the Nikkei slipped from its historic peak. Investors who have bought stocks using credit are often forced to close their positions when stock prices fall more than expected, unless they have enough extra cash for collateral to deploy.

“We see what appears to be forced selling from retail investors. They seem to be damaged,” said Takatoshi Itoshima, a strategist at Pictet Asset Management. “While it is possible that we are reaching a selling climax in the near term, I cannot be sure.” 

A rapidly strengthening yen contributed to the decline in equities as it erodes the profits of Japan’s large exporters. The yen shot up more than 3% against the dollar to reach its highest level since early January. That deepened the pain for households that speculate in currency. 

“People who don’t have long experience in investment may have not gone through big market declines like this so the shock might be quite big,” said Masahiro Ichikawa, chief strategist at Sumitomo Mitsui DS Asset Management. “I think it will take a bit more time for the market to stabilize after such big falls.”

  - Bloomberg