Japanese stock markets took their biggest plunge since 1987 on Monday, sending shockwaves through global markets. But the next day, Japanese markets rallied strongly, recording their biggest daily gain since 2008, The Washington Post reports.
Chaos in global financial markets this week caused turmoil in Asia, the US and elsewhere. But Japan, the world’s fourth-largest economy, is having a particularly tumultuous time.
That’s partly because of what’s happening in the world’s largest economy: Unexpectedly low US employment numbers in July and rising unemployment, and the likelihood that the Federal Reserve will cut interest rates in response, have led to fears of slowing growth in the United States and around the world.
On top of that, rapid changes in the value of the Japanese currency and recent monetary policy decisions by the Bank of Japan have further fuelled panic in the market, experts say. Kyle Rodda, a senior market analyst at Capital.com who is based in Melbourne, Australia, said:
Signs of weakness in the US economy have acted as the spark for these events, while the technical factors in Japanese financial markets are the fuel.
Why have Japanese markets been hit so hard?
A combination of factors caused the Japanese market to suffer badly last week – Monday saw the biggest one-day drop since 1987 – including the rapid strengthening of the Japanese currency, experts said.
The yen has been weak against the dollar for the past five years, losing more than 40 per cent of its value, but it has strengthened in recent weeks, hitting its highest level against the dollar since March on Thursday.
That followed a rare decision by the central bank, the Bank of Japan, to raise interest rates.
According to Hirokazu Kabeya, chief global strategist at Daiwa Securities in Tokyo, the yen’s rise has fuelled fears that earnings at export-oriented Japanese companies will fall. Those concerns have contributed to falling stock prices and rising sales, Kabeya said.
Technology stocks around the world also fell after the Biden administration said last month it would impose further restrictions on semiconductor exports to China. The announcement affected markets with major chip makers such as Japan, South Korea and Taiwan.
Then the US jobs report on Friday fell short of market expectations, leading to uncertainty about the US economy and questions about whether the Federal Reserve would intervene. A few days earlier, the FED left interest rates unchanged, according to The Washington Post.
What is “yen trading”?
For years, while fighting deflation, Japan kept interest rates negative. This made it attractive for investors to borrow cheaply in yen, which was then used to buy assets in currencies with high interest rates and predictable returns, such as US Treasuries or shares in US technology companies. This “carry trade” investment strategy has become popular in recent years. Kei Okamura, portfolio manager based in Japan at the investment firm Neuberger Berman, said:
So if you borrow in yen and you buy higher-yielding assets overseas, you can make a handsome profit.
However, in March, Japan’s central bank raised interest rates for the first time since 2007. On 31 July, the BOJ raised interest rates again to around 0.25%, which caused the yen to spike in value against the dollar.
The latest rate hike was unexpected – the market had assumed it would come in September – and Bank of Japan Governor Kazuo Ueda said the rate hike could go ahead. That caused the yen to rise rapidly, Rina Oshimo, a senior strategist at Okasan Securities Co. in Tokyo, said.
When the yen appreciates, it makes carry trade investments riskier and investors start selling off the yen, experts say. That’s exactly what happened after the Bank of Japan’s decision: a sharp global sell-off in risky assets bought with yen disrupted markets around the world.
What’s happening now?
After a 12 per cent fall on Monday, the Nikkei 225 stock index posted its biggest daily gain since October 2008, rising 10.23 per cent on Tuesday, The Washington Post reports.
Japanese economists say the latest market fluctuations are a short-term phenomenon and not necessarily a sign of significant structural deterioration in the country’s economy. Takahide Kiuchi, executive economist at the Nomura Research Institute in Tokyo, said:
There isn’t too much of a long-term impact on the Japanese economy at this point. The rapid appreciation of the yen and falling stock prices will be a headwind for the economy as a whole, including consumer spending.
Some of Monday’s fluctuations were due to “overreaction by market participants,” Kabeya said.
Japan’s low interest rate policy is expected to continue despite the current upward phase, Takehiko Masuzawa, head of equity trading at Phillip Securities Japan, said, adding that he expects the market to calm down.
