Nikkei Index Falls 6% Amid US Recession Concerns... Second Largest Drop Ever

Triple Shock Hits
US Recession Concerns, Semiconductor Stocks Plunge, Yen Strength Forecast

The Nikkei 225 index, a representative stock index of the Japanese stock market, plunged nearly 6% on the 2nd due to a sudden 'triple shock.' This followed a sharp decline in the New York stock market amid growing recession concerns triggered by worsening U.S. manufacturing and employment indicators, along with a simultaneous drop in semiconductor stocks that had driven the market rally. The rapid rise in the yen's value also dampened investor sentiment due to concerns over poor earnings among Japanese export companies.

On that day, the Nikkei 225 index on the Tokyo Stock Exchange closed at 35,909.70, down 2,216.63 yen (5.81%) from the previous session. The decline was the second largest since 1987. The TOPIX index, which covers first-section listed companies on the Tokyo Stock Exchange, also fell 6.14%, marking its largest drop since 2020.

[Image source=Reuters Yonhap News]

There are three main reasons cited for the stock plunge. First, the deterioration of U.S. economic indicators and the resulting decline in the New York stock market extended to the Tokyo market. On the 1st (local time), the three major indices of the New York stock market all closed lower amid spreading recession fears triggered by the released manufacturing and employment data. The July manufacturing PMI (Purchasing Managers' Index) remained below 50, indicating economic contraction, and weekly initial jobless claims hit their highest level in a year, reinforcing contraction signals.

Kensuke Noda, Chief Portfolio Manager at Nissay Asset Management, said, "Due to worsening economic indicators, investors who had anticipated a soft landing for the U.S. economy have started to fear a hard landing. The market is concerned that the Federal Reserve's indication of a rate cut at the July Federal Open Market Committee (FOMC) meeting is not simply because inflation has eased, but because the economy may be deteriorating."

Another factor cooling investor sentiment was the increased earnings uncertainty following an earnings shock by Intel in the New York market, just as Japanese semiconductor stocks, which had supported the Tokyo market, were about to announce their earnings. On that day, Tokyo Electron fell 12%, while SoftBank Group and Advantest dropped about 8%, leading the decline. Toyo Miura, Senior Technical Analyst at Mizuho Securities, reported, "Selling is occurring mainly among major companies that had attracted buying interest due to expectations of earnings upgrades from the weak yen." The recent AI bubble theory, which claims that technology companies, especially on Wall Street, are investing excessively compared to AI demand, has also contributed to the weakness in tech stocks.

Additionally, the yen's value has been rising. Following the Bank of Japan's (BOJ) policy rate hike to 0.25% on the 31st of last month and the Fed's indication of a rate cut in September, the U.S.-Japan interest rate differential, which had caused the weak yen, is narrowing. The dollar-yen exchange rate, which was in the 160 yen range per dollar earlier this month, dropped to 151 yen around the BOJ meeting announcement and is currently trading in the 149 yen range. A decline in the dollar-yen exchange rate means a rise in the yen's value.

Market analysts predict that the Tokyo stock market's downward trend will continue for some time due to increased exchange rate volatility. Zaher Khan, Senior Fund Manager at UBP Investment, explained, "With such high volatility in both exchange rates and stocks, long-term foreign investors will not enter the market now." Yusuke Sakai, Senior Trader at T&D Asset Management, said, "The downside is currently unclear. The positive news from a few days ago, such as strong earnings, has been forgotten amid the selling pressure." Shoichi Tokuoka, Chief Fund Manager at Mitsubishi UFJ Asset Management, commented, "The daily drop feels somewhat excessive."

The market is now awaiting the U.S. July employment report, which will be released that night in Japanese time. The Nihon Keizai Shimbun (Nikkei) noted, "If the unemployment rate worsens more than expected, the Tokyo stock market may continue to decline early next week." Currently, Wall Street expects the U.S. July unemployment rate to remain at 4.1%, the same level as the previous month.

This content was produced with the assistance of AI translation services.