Japanese equities experienced their most significant decline since 2020, with the Topix index plummeting over 10% from its peak in July. The downturn follows unexpected tightening of monetary policy by the Bank of Japan (BOJ), which has sent shockwaves through one of the world’s top-performing markets.
The recent surge in the yen negatively impacted exporters, while financial stocks fell due to fears that their recent gains might have been overstated. The Topix index dropped as much as 5.7% on Wednesday, setting the stage for a potential two-day decline of approximately 8%. If the index maintains these levels, it will join the Nikkei 225 Stock Average in a technical correction.
The dramatic downturn in Japanese stocks comes on the heels of the yen’s appreciation to a four-month high against the dollar, which has adversely affected exporters like Honda Motor Co. Simultaneously, higher yields have weighed on real estate companies such as Mitsui Fudosan Co. Just three weeks prior, Japanese stocks had reached new highs, with financials benefiting from the anticipated BOJ rate hike.
“I didn’t expect such a severe drop in stocks—it’s catastrophic,” commented Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo. “While this might be a temporary situation, Japanese stocks are facing their most challenging period.”
Investors have been cashing out on financial stocks, which had previously been the Topix’s strongest performers, based on the belief that they would gain from higher interest rates. The banking sector index fell more than 8% as a result.
Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte, described the situation as “heavy forced selling,” noting that many firms may be aggressively reducing risk, leading to indiscriminate selling.
A major concern for the market is the yen, which reached 148.51 against the dollar on Thursday, its highest level since mid-March. Strategists at Amundi and TD Securities predict that the yen could strengthen further, potentially reaching 140.
Kyle Rodda, senior market analyst at Capital.Com, attributed the market’s troubles primarily to the yen’s performance. “Markets are increasingly anticipating US rate cuts due to fears of slowing economic activity, while the BOJ is only beginning to tighten its policies.”
Foreign investors, once key drivers of the market’s growth, sold a net ¥1.56 trillion ($10.4 billion) in Japanese equities and futures in the week ending July 26, as reported by Japan Exchange Group Inc. During this period, the Topix fell more than 5%, marking its steepest drop in four years.
The retreat from major technology stocks exacerbated the downturn. Concerns over the US economy led traders to question the Federal Reserve’s decision to delay interest rate cuts, following data showing a significant increase in US unemployment claims and a contraction in manufacturing.
Technology shares, including Tokyo Electron Ltd., which dropped as much as 12%, and Screen Holdings Ltd., down 11%, were among the hardest hit on the Nikkei.
Ryuta Otsuka, a strategist at Toyo Securities Co., remarked, “Foreign investors appear to be withdrawing due to changing corporate earnings outlooks amid concerns about the US economic slowdown and a stronger yen. The market has clearly become bearish in the short term, and the medium-term trajectory of Japanese stocks might be shifting due to worries about the US and Chinese economies.”
