The Nikkei 225 stock index in Japan dropped by 12.4% as investors sold off a wide range of shares. The decline came amidst concerns about the state of the U.S. economy.
This 12.4% loss on the Nikkei was its worst day since the “Black Monday” crash in 1987. The index closed at 31,458.42, marking a drop of 4,451.28 points. This decline follows a 5.8% drop on Friday, resulting in the worst two-day decline ever for the Nikkei.
Additionally, Japan’s Topix index also tumbled by 12.23% to close at 2,227.15.
Share prices for companies across various sectors in Japan were heavily impacted. For instance, Toyota Motor Corp.’s shares fell by 11%, Honda Motor Co. experienced a 13.4% decline, and Mitsubishi UFJ Financial Group plummeted by 18.4%.
The sell-off in Japan’s stock market occurred after the Bank of Japan raised its benchmark interest rate last week, leading to a 3.8% decrease from the previous year. This move has raised concerns about the broader Asian markets as well.
In response to the magnitude of the sell-off, circuit breakers kicked in, temporarily halting trading for indexes such as the Kospi and Kosdaq in South Korea.
Furthermore, concerns have arisen about the impact of the strengthening yen on Japanese stock markets. The yen’s value has increased against the U.S. dollar, affecting the competitiveness of Japanese export-oriented firms. This was triggered by the Bank of Japan’s decision to raise the benchmark interest rate and reduce its purchases of Japanese government bonds.
Given the situation, investors will be closely watching key trade data from China and Taiwan, as well as upcoming central bank decisions from Australia and India.
The Yen Barometer
Tay mentioned that the yen’s strength can be a key indicator of the Japanese market’s performance. As the yen has strengthened, stock prices have fallen, indicating significant pressure on the Japanese stock market. Tay attributed some market gains to corporate restructuring efforts by the Tokyo Stock Exchange but emphasized that the primary driving force was the strength of the Japanese yen.
One important factor contributing to the impact of the yen on the Japanese market is the unwinding of the “yen carry trade”. When the yen was weak and interest rates from the Bank of Japan (BOJ) were at zero or negative, investors borrowed yen and invested the funds in higher-yielding assets.
Using the central bank benchmark interest rates as a reference, an investor could have previously borrowed yen at a 0% interest rate and invested the funds in the U.S., earning an interest rate of 5.25%.
However, with the U.S. Federal Reserve indicating potential rate cuts and the Bank of Japan raising rates, the interest rate differential between the two central banks will narrow, making the “carry trade” less attractive, which could lead to further strengthening of the yen.
Tay anticipates that the yen could potentially reach 143 against the dollar. Still, if Japanese life insurance companies and pension funds increase their repatriation of yen back to Japan, the currency could strengthen further to 135 against the dollar.
Tay expressed his view that although the yen may stabilize at a certain level, the Japanese stock market is still not appealing enough for him to consider investment.
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