Nikkei 225 Sinks 5.66%, Topix Suffers Worst Day in Eight Years

Nikkei 225 Sinks

Asia-Pacific markets continued their downward spiral today, with Japan’s Nikkei 225 and Topix indices leading the rout. The Nikkei 225 fell by more than 5%, nearing bear market territory, as heavyweights like Mitsubishi, Mitsui & Co., Sumitomo, and Marubeni plunged over 10%.

This decline comes amid a broader regional sell-off, influenced by a surge in the Japanese yen and weak economic data from the United States.

The Nikkei 225 index dropped 5.66%, closing at 33,876.95, while the Topix fell similarly, both indices now down almost 20% from their all-time highs in July.

Monday’s decline follows Friday’s sharp falls of 5% in the Nikkei and 6% in the Topix, marking the Nikkei’s worst day since March 2020 and the Topix’s worst in eight years.

The Japanese yen strengthened to its highest level against the US dollar since January, trading at 145.42. This surge has negatively impacted Japanese exporters, making their goods more expensive overseas and cutting into profits. The yen’s rise was partly driven by the Bank of Japan’s interest rate hike on July 31, which triggered the sell-off.

The sell-off was exacerbated by weak economic data from the United States. Nonfarm payrolls rose by only 114,000 in July, a figure significantly lower than expected and one of the weakest since the pandemic began. The unemployment rate climbed to 4.3%, its fourth consecutive monthly increase, raising fears of a potential recession.

Other Asia-Pacific markets mirrored Japan’s decline. Australia’s S&P/ASX 200 fell by 2.3% to 7,723.8, and South Korea’s Kospi dropped by 3.96% to 2,570.1. Hong Kong’s Hang Seng Index also faced declines, with futures indicating a fall to 16,901, down from the last close of 16,945.51.

Foreign investors, previously driving Japan’s market rally, sold a net ¥1.56 trillion in Japanese equities and futures in the week ending July 26. This marks the most significant outflow in four years, contributing to the Topix’s 5% drop during that period.

All 33 industry groups in the Topix index have declined since the Bank of Japan’s rate hike.

The relationship between interest rate markets and the USD/JPY exchange rate has been crucial in this sell-off. Narrowing yield differentials between US and Japanese bonds have influenced the USD/JPY currency pair, impacting the Nikkei 225. This interconnection has led to a risk-off sentiment in the forex market, which has spilled over into equities.

Market stability may depend on the yield spreads between US and Japanese bonds. If these spreads begin to widen, it could signal a bottoming out for the USD/JPY pair and the Nikkei 225.

However, the upcoming US non-manufacturing PMI report could further influence market sentiment. If it confirms recessionary trends, additional downward pressure may ensue.