Japanese Stock Market Rally Stalls Amid Economic Concerns
A prolonged rally in Japanese stocks, largely fueled by the country’s depreciated currency, encountered a significant setback towards the end of the week. The Topix index, encapsulating a diverse range of companies across the Japanese economy, experienced a sharp decline of 6.1 percent, marking its worst two-day performance since the devastating earthquake and tsunami in 2011. Similarly, the Nikkei 225 index fell 5.8 percent on Friday alone.
Market analysts observed a palpable “state of panic” among investors following the Bank of Japan’s decision on Wednesday to raise interest rates for only the second time since 2007. The sentiment deteriorated further on Friday amidst growing concerns regarding the health of the economy and the tech sector in the United States.
The central bank’s recent move raised its key interest rate to 0.25 percent, up from a range of zero to 0.1 percent. This adjustment provided a boost to Japan’s currency, the yen, which was trading around 149 yen to the dollar on Friday, demonstrating a notable recovery from a staggering 154 yen at the beginning of the week.
A weaker yen had traditionally benefitted Japan’s major exporters by inflating their earnings and enhancing the competitiveness of Japanese products in the global market. For years, policies that maintained rock-bottom interest rates, keeping the yen weak, were fundamental to Japan’s economic strategy.
This interplay of a depreciated yen and soaring corporate profits peaked in recent years as the yen plummeted to near four-decade lows against the dollar. Companies like Toyota achieved some of the largest profits in Japanese history, attracting substantial investor interest and propelling Japanese indexes to a series of unprecedented highs.
However, some economists are now suggesting that this trend may be reversing. Takahide Kiuchi, an executive economist at Nomura Research Institute, noted in a report on Friday, “It can be understood that the bubble of a weak yen and high stock prices created by the Bank of Japan has entered the process of collapsing.”
Japanese markets are also facing the dual challenge of a potential slowdown in growth in the United States. The S&P 500 index fell 1.4 percent on Thursday, and tech shares plummeted following an announcement from Intel regarding a 15 percent workforce reduction.
While the U.S. Federal Reserve decided to maintain interest rates, which are currently at a more-than-two-decade high, analysts anticipate that a rate cut will be forthcoming later this year. The combined effect of a stronger yen and concerns surrounding the tech sector has severely impacted Japanese exporters involved in the semiconductor supply chain, with shares of Tokyo Electron, the country’s leading semiconductor equipment manufacturer, dropping 12 percent on Friday.
In the long term, a consistent appreciation of the yen is expected to yield mostly positive outcomes for Japan, aiding in alleviating the import-driven inflation that has been pressuring consumers. Nevertheless, analysts are wary of the abrupt strengthening of the currency due to its potential detrimental effects on corporate profits.
Japan’s finance ministry has expressed its intent to closely monitor developments concerning the yen. Finance Minister Shunichi Suzuki stated in a news conference on Friday, “Sudden fluctuations could increase uncertainty in business activities and have a negative impact on people’s lives.”
