Japanese Stock Market Faces Setback Following Interest Rate Hike

Japanese Stock Market Faces Turbulence After Remarkable Rally

The Japanese stock market, which enjoyed a robust rally for over a year thanks to the depreciation of the yen, encountered a significant setback at the end of the week. The Topix index, encompassing a diverse range of companies across the Japanese economy, experienced a sharp decline of 6.1 percent, marking its steepest two-day drop since the catastrophic earthquake and tsunami of 2011. In tandem, the Nikkei 225 index plummeted by 5.8 percent on Friday.

Market analysts reported a palpable sense of panic among investors following the Bank of Japan’s decision on Wednesday to raise interest rates for only the second time since 2007. This decision heightened concerns about the overall health of the economy, particularly in relation to the tech sector in the United States, further exacerbating negative sentiment on Friday.

The central bank’s action raised its key interest rate to a quarter point, a notable increase from the previously maintained range of zero to 0.1 percent. This move provided a boost to Japan’s currency, the yen, which was trading around 149 to the dollar on Friday, a significant recovery from a rate of 154 at the beginning of the week.

For years, a weaker yen had been advantageous for Japan’s major exporters, inflating their earnings and enhancing the global competitiveness of Japanese goods. Policies that maintained historically low interest rates, which kept the yen weak, had long been a cornerstone of Japan’s economic strategy. This combination of a weak yen and soaring corporate profits reached a pinnacle in recent years, as the yen sank to near four-decade lows against the dollar. Major corporations like Toyota reported record-breaking profits, attracting a wave of investor interest and propelling Japanese stock indexes to unprecedented heights.

However, some economists are beginning to suggest that this trend is now reversing. Takahide Kiuchi, an executive economist at Nomura Research Institute, articulated in a note on Friday that, “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.”

In addition to these domestic challenges, Japanese markets are grappling with concerns about a potential slowdown in growth within the United States. The S&P 500 index faced a 1.4 percent drop on Thursday, with tech shares experiencing a significant plunge following Intel’s announcement of a plan to reduce its workforce by 15 percent.

While the U.S. Federal Reserve opted to keep interest rates unchanged at a meeting on Wednesday—maintaining levels at a more-than-two-decade high—analysts widely anticipate that rate cuts could begin later this year.

The dual impact of a stronger yen and anxieties surrounding the tech sector has taken a toll on Japanese exporters, particularly those involved in the semiconductor supply chain. Shares of Tokyo Electron, Japan’s leading manufacturer of semiconductor equipment, fell a staggering 12 percent on Friday.

In the long term, a gradual appreciation of the yen is expected to yield positive outcomes for Japan, particularly in alleviating the import-driven inflation that has been straining consumers. However, analysts caution that the abrupt strengthening of the currency could pose challenges due to its potential adverse effects on corporate profitability.

Japan’s finance ministry has stated that it is closely monitoring the developments surrounding the yen. Finance Minister Shunichi Suzuki emphasized in a news conference on Friday that, “Sudden fluctuations could increase uncertainty in business activities and have a negative impact on people’s lives.”