Context and Recent Developments

On August 5, 2024, Japan’s capital markets recorded their most severe losses since the 1987 stock market crash. The Nikkei and TOPIX indices both fell by over 8%, registering a drop of approximately 20% from the historical highs reached on July 11. Popular trading houses such as Mitsubishi, Mitsui & Co, Sumitomo, and Marubeni also suffered losses of around 10% each.

This Monday’s crash followed a significant drop on Friday, when the Nikkei and TOPIX fell by 5% and 6%, respectively. The main reason for this decline was the decision by the Bank of Japan to raise interest rates and reduce purchases of government bonds.

Determinant Factors and International Reactions

At the same time, the Japanese yen hit its lowest level against the US dollar since January 2024, reaching a value of 142.77. According to Kelvin Tay, regional investment director at UBS Global Wealth Management, the primary reason for the Japanese market’s growth over the past two years was the weakness of the yen. With the reversal of this trend, investors began to withdraw en masse.

The situation in Japan was exacerbated by uncertainties in the US market, where the Federal Reserve has been ambiguous about potential rate cuts in September. These uncertainties have caused panic among investors, leading to massive asset sell-offs.

Kazuo Ueda, governor of the Bank of Japan, stated that if the economy and prices move in line with projections, the institution will continue to raise interest rates.

Recovery and Future Outlook

On Tuesday, August 6, 2024, Japanese stocks saw a spectacular rebound, with the Nikkei 225 index rising by 10% and the TOPIX index by 9%. This recovery came amid a mixed recovery in global markets. For example, South Korea’s Kospi rose by 3.3%, and Taiwan’s stocks by 3.4%. However, Hong Kong’s Hang Seng index fell by 0.3%.

European markets also recovered some of their losses but saw declines again towards the end of Tuesday. The Stoxx 600 index fell by 0.3%, and London’s FTSE 100 also fell by 0.3%. In the United States, futures contracts on the S&P 500 and Nasdaq rose in pre-market trading, suggesting a positive opening for the US market.

Neil Newman, head of strategy at Astris Advisory in Tokyo, noted that this rebound is typical after a major market crash. However, he emphasized that short-term volatility remains high and that market stability is still uncertain until the reporting of first-half earnings by Japanese companies in October or even after the US presidential elections in November.

Impact of Yen Appreciation and Economic Outlook

The rapid appreciation of the yen has had a significant impact on the competitiveness of Japanese exports. On Monday, the yen reached a seven-month high against the US dollar before falling by about 1.2% on Tuesday, to 146. The appreciation of the yen forced many market participants to quickly abandon carry trade strategies, a popular investment method.

Decades of extremely low interest rates in Japan have led investors to borrow cheap money and convert it into other currencies to invest in higher-yielding assets. The unwinding of this strategy was the main trigger for market turbulence, said Stephen Innes, managing partner at SPI Asset Management.

The Bank of Japan raised interest rates for the second time this year and announced plans to reduce bond purchases. Traders anticipate further rate hikes this year in an attempt to control inflation.

Japanese Prime Minister Fumio Kishida said on Tuesday that it is important to make calm judgments about the market situation and expressed an optimistic outlook on the economy, citing the rise in real wages adjusted for inflation for the first time in more than two years, which occurred in June.

Conclusion

The Japanese stock market is facing a period of high volatility, triggered by rising interest rates and yen appreciation. Although there are signs of short-term recovery, long-term prospects remain uncertain, depending on global economic developments and future decisions by the Bank of Japan. Investors remain cautious, closely monitoring financial reports and political developments in Japan and the United States.