On the 5th, the Japanese market experienced a sharp decline in stock prices for consecutive days, with the Nikkei average hitting its largest drop in history. Concerns about the US economy, combined with the repercussions of interest rate hikes in Japan, accelerated the flight to quality, leading to increased purchases of bonds and the yen.
“For Sale” sign posted on a house in the Capitol Hill area of Washington D.C. (July 30)
Photographer: Tierney L. Cross/Bloomberg
The US employment statistics released last weekend suggested that the labor environment is deteriorating at a pace exceeding expectations. Stocks related to the economically sensitive semiconductor sector fell, and shares of banks and trading companies were also sold off, leading to a broad market decline. The drop in the Nikkei exceeded that of Black Monday the day after October 20, 1987, making it the second largest percentage decline in history. As investors moved to avoid risks amid the falling stock prices, bond prices surged (interest rates fell) and the yen appreciated overall.
The US unemployment rate has risen and reached a level indicative of the onset of recession known as the “Sahm Rule.” Bitcoin has also sharply fallen, symbolizing risk-off sentiment. There are views that a US rate cut in September is now likely, but concerns about it being too late have led to volatile movements in the safe-haven asset gold after an initial decline. The deterioration of the US economy is also seen to influence additional rate hikes by the Bank of Japan.
Kenji Abe, the chief strategist at Daiwa Securities, pointed out in a report on the 5th that US financial authorities may have fallen behind the curve by overly fearing a resurgence of inflation, delaying the start of interest rate cuts. On the other hand, some projections suggest that signaling a significant rate cut by autumn could help global stocks recover by the end of the year.
| Japanese Stock, Bond, and Currency Markets (after 3:25 PM) |
|---|
|
|
|
Stocks
The Tokyo stock market saw a significant decline. In the afternoon, it expanded its losses, with major stock indices slipping below levels indicative of a “bear market.” The US employment statistics heightened concerns over the economic outlook, spreading a risk-off mood. Coupled with a stronger yen and escalating tensions in the Middle East, all 33 sectors on the Tokyo Stock Exchange, including financial stocks, fell.
Japanese stocks briefly entered a “bear market,” plunging due to concerns over the US economy and position liquidation.
On this day, in addition to financial stocks, semiconductor and other technology stocks, as well as export-related shares, plummeted significantly. The decline was broad-based, with both domestic and foreign demand hampered, leading to substantial drops in the indices. Both the Nikkei and the TOPIX recorded their sharpest declines since the day after Black Monday.
Bank stocks continued to drop sharply, with MUFG recording its largest decline ever as awareness of declining long-term interest rates set in.
Junpei Tanaka, a strategist at Pictet Japan, pointed out that Japanese stocks are heavily influenced by the dollar-yen exchange rate, and the concerns about the US economy prompting the Federal Reserve (FRB) to accelerate rate cuts has led to a “vicious cycle” of yen appreciation and dollar depreciation. He believes that active buying of Japanese stocks will be curbed until a bottoming out of the dollar-yen rate is confirmed.
Retail securities are responding urgently to customers amid sharp stock price declines, expressing concerns about the movement of individual money.
The fear index for the Nikkei (VIX index) was at 68.07 as of just after 3 PM, the highest level since the aftermath of the Great East Japan Earthquake on March 16, 2011.
Analyst Tim Morse of Asymmetric Advisors noted, “The sharp drop from the 145 to the 142 level in the dollar-yen exchange rate increases the possibility that technical barriers will be further breached.” Many export companies had assumed a rate around 140 to 145 yen, leading him to believe that the foreign exchange benefits previously factored in by investors have nearly vanished.
Bonds
Bond prices soared significantly. Following disappointing US employment statistics for July, long-term interest rates fell sharply, leading to a surge in buying. A circuit breaker was activated, temporarily suspending trading in long-term bond futures.
Takahiro Otsuka, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, noted that not only the significant decline in US interest rates but also fears regarding the domestic fundamentals due to concerns about the US economy have strengthened buying sentiment, reducing expectations for an early additional rate hike by the Bank of Japan.
Eiichiro Miura, head of strategy at Nissay Asset Management, pointed out that since the risk asset market has collapsed, short positions are being unloaded, and the softness of US economic indicators has attracted intense buying in the yen bond market.
He further indicated, “If the Bank of Japan continues to see such declines in stocks and rises in the yen, it will have to revise the policies it recently laid out and must communicate that the pace of rate hikes will slow significantly.”
Newly Issued Bond Yields (as of 3 PM)
| 2-Year Bond | 5-Year Bond | 10-Year Bond | 20-Year Bond | 30-Year Bond | 40-Year Bond | |
|---|---|---|---|---|---|---|
| 0.260% | 0.375% | 0.760% | 1.600% | 1.925% | N/A | |
| Change from previous week | -15.0bp | -20.0bp | -19.5bp | -12.0bp | -15.0bp | — |
Currency
The yen exchange rate in the Tokyo foreign exchange market rose over 3% against the dollar, hitting the 141 yen level for the first time since January. Following the significant decline in US stock index futures and Japanese stocks, yen buying continued due to risk aversion stemming from deteriorating investor sentiment.
Masaaki Ueda, the head of financial market research at SBI Liquidity Market, indicated that after a significant drop in US stocks last weekend, today’s drop in Japanese stocks was even greater, resulting in a continued negative chain reaction. “The market is gripped by fear, and the flow of risk aversion continues, so we don’t know where the yen’s appreciation and the dollar’s depreciation will stop,” he stated.
Hiroyuki Machida, director of foreign exchange and commodity sales at the Australia and New Zealand Banking Group, noted that based on the correlation between the dollar-yen exchange rate and dollar interest rates, the fair value is around 142 yen, adding, “The yen has the potential to outperform significantly, rising to 140 yen.”
