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Photograph: Reuters
Aug 5th 2024
As fears of an American recession spread, stock markets worldwide have suffered. But none has taken as severe a beating as Japan’s. On August 5th Topix plunged by 12% in its worst performance since 1987, compared with 2-3% falls in America, Britain, and Europe. The index is now almost a quarter below its peak, reached barely a month ago. Meanwhile, the yen is snapping back: it is up 13% from less than a month ago, when it was weakest in 37 years. These sharp moves carry implications not just for Japanese investors and firms. The country’s financial heft means that it could become a source of further volatility in nervous global markets.
What is the main reason behind
The sharp decline in Japan's stock market in August 2024 was triggered by a combination of domestic and international factors. On August 5, 2024, the Nikkei 225 suffered a dramatic fall, losing over 12% in a single day, its worst drop since the market crash of 1987. This steep decline was largely due to the Bank of Japan's unexpected interest rate hike,
See also: Why does BOJ increase the interest rate?
which surprised investors and caused widespread selling. The higher interest rates also led to a strengthening of the yen, which hurt export-dependent companies, exacerbating the market downturn.
Compounding these issues were concerns about a slowing U.S. economy. A disappointing U.S. jobs report in July raised fears of a potential recession, further shaking investor confidence globally. This, combined with weakening economic data from China, contributed to global market instability and intensified the sell-off in Japan.
The interconnectedness of global markets, including the unwinding of the yen carry trade (a popular investment strategy),
See also: How the Japanese yen currency appreciation affects carry trade strategy
deepened the market's volatility across asset classes like equities and forex.
How does it affect the Yen currency?
When the Bank of Japan raises interest rates, it makes borrowing more expensive and saving more attractive. Here’s how this affects the yen's currency value:
1. Increased foreign investment: Higher interest rates often attract foreign investors seeking better returns. When Japan raises its rates, foreign investors might buy yen to invest in Japanese assets, increasing demand for the currency. This increased demand causes the yen to *appreciate*.
2. Reduced carry trades: Many investors borrow yen at low interest rates and invest in higher-yielding assets abroad (the yen carry trade). When rates increase, the cost of borrowing yen rises, and investors unwind these trades by selling foreign assets and buying yen to repay their loans, which also boosts the yen's value.
3. Inflation control: Raising rates is a way to curb inflation by reducing the money supply, which stabilizes the currency's purchasing power. A stronger currency can also lower the cost of imports, further stabilizing inflation.
Therefore, an increase in interest rates generally leads to yen *appreciation* because of rising demand for the currency from both domestic and foreign investors【6†source】【7†source】.
Thats how the story of Japanese index plummeted, let me know if you have any question in the comment!
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