Monday saw severe turmoil in Japan’s financial markets, with the yen rebounding approximately 13% from its low in July against the dollar, while stocks fell into a bear market. Yields on benchmark Japanese government bonds experienced their most significant drop in over two decades.
This volatility has caught many investors off guard, affecting everyone from small retail traders to major hedge funds and financial institutions. The decline in bond yields, which threatens to reduce interest income for lenders, has led to unprecedented drops in the market values of Japan’s three largest banks. Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc., and Sumitomo Mitsui Financial Group Inc. collectively lost about 12 trillion yen ($85 billion) over the past two trading days.
The yen’s sharp appreciation, accelerating since the Bank of Japan’s interest rate hike on July 31, is also disrupting global markets by upending investment strategies reliant on cheap yen borrowing.
Charu Chanana, head of currency strategy at Saxo Markets, noted the challenge for Japanese policymakers: “A loose monetary policy devalues your currency, and even a slight hint of tightening can damage your stock market.” Chanana suggested that if concerns over a potential U.S. recession grow, the yen might approach 140 to the dollar, which could further pressure Japanese stocks.
The Nikkei Stock Average Volatility Index surged to its highest level since data compilation began in 2001, indicating a cycle of selling begetting more selling, as explained by Takehiko Masuzawa, head of equity trading at Phillip Securities Japan.
Following the Bank of Japan’s rate increase, all 33 industry groups in the Topix index have seen declines. The index, which fell into correction territory with a drop of over 10% from its July peak, has now entered a bear market, with the decline approaching 24%.
Noritaka Oda, head of debt syndication at SMBC Nikko Securities Inc., remarked, “Falling stock prices suggest deteriorating business performance and potential widening credit spreads if the economy weakens.”
The benchmark 10-year Japanese government bond yield decreased by 20.5 basis points to 0.75%, marking its most significant drop since 1999, according to Bloomberg data.
The risk-off sentiment is not confined to Japan alone. A global bond rally, largely driven by concerns over the U.S. economic outlook, has led investors to flee risk assets in favor of safe havens. There is growing anxiety that the Federal Reserve may be lagging in its policy response, prompting a broader shift in investment strategies.
The sharp downturn in the Japanese stock market appears to have triggered a wave of forced selling among retail investors, exacerbating the market decline. Retail investors’ margin buying positions reached an 18-year high in late July, even as the Nikkei began to decline from its peak.
Takatoshi Itoshima, a strategist at Pictet Asset Management, commented, “It seems that retail investors are undergoing forced selling. While we might be approaching a selling climax, certainty is elusive.”
