Japanese stocks fell sharply for the second consecutive day, driven by growing expectations of additional rate hikes by the central bank. The decline in Asian equities followed Wall Street’s losses, which were triggered by weakening U.S. economic data. The broad Topix index in Japan dropped by over 4%, while technology stocks, including AI chipmaker SK Hynix, experienced significant declines.
Earlier in the year, Japanese stocks had surged to record highs, buoyed by stronger corporate earnings, a weak yen, modest inflation, and improved corporate governance. The market’s rise was also fueled by gains in chip-related stocks. However, the outlook for earnings growth, previously supported by a weaker yen, has become more uncertain. The yen has been strengthening against the dollar since early July, partly due to increasing expectations for the Bank of Japan’s reduction of monetary stimulus and potential rate cuts by the Federal Reserve.
Japanese Stocks and the Impact of Currency Fluctuations
On Wednesday, the Bank of Japan (BOJ) raised its policy rate to 0.25% and announced plans to roughly halve its monthly government bond purchases by early 2026. This move has contributed to the yen trading at around 149.53 to the dollar, up from about 161 in early July. A weaker yen typically boosts earnings for Japanese companies by making exports more competitive and enhancing the value of foreign profits in yen terms. However, the recent strengthening of the yen has led to a less favorable outlook for Japanese stocks.
The Nikkei Stock Average was down 4.0% at 36,588.75 on Friday morning, having fallen as much as 5.3% earlier. This decline marks one of only five instances in the past five years where the index has dropped more than 4.0% in a single day, a pattern reminiscent of the early Covid-19 pandemic days in March and April 2020.
Semiconductor equipment manufacturers in Japan were among the biggest losers. After Intel announced plans to cut costs by over $10 billion next year—through reductions in capital expenditures and job cuts—Tokyo Electron Ltd. saw its shares drop 10%, while Lasertec fell by 8.5%. Mitsubishi UFJ Financial Group also declined 7.5% following a 0.4% decrease in its first-quarter net profit compared to the previous year, partly due to higher credit costs. Additionally, Toyota Motor dropped 2.2%, compounding an 8.5% decline on Thursday after its first-quarter earnings report.
Other Asian indexes followed suit, with South Korea’s benchmark Kospi falling 2.8% due to substantial losses among chipmakers. Australia’s S&P/ASX 200 was down 2.1% after a series of record highs, and equities in China also started lower, with the Shanghai Composite Index down 0.3%.
In the U.S., economists are anticipating a slowdown in job growth in the government’s July employment report, due on Friday. Forecasts suggest that the unemployment rate will remain steady at 4.1%. A survey by 22V Research indicates that 42% of investors expect a “risk-off” reaction to the jobs data, 36% foresee a “negligible/mixed” response, and only 22% predict a “risk-on” outcome.
Chris Senyek of Wolfe Research remarked, “The labor market has been signaling concerns over the past few months. Historically, this suggests that Powell may be walking a fine line, potentially delaying rate cuts until it’s too late.”
In commodities, oil prices saw an increase after a decline on Thursday, driven by concerns that Middle East tensions might disrupt supply. Meanwhile, gold prices fluctuated near record levels, reflecting ongoing uncertainty in the global markets.
Overall, the recent trends in Japanese stocks, coupled with the broader economic indicators, highlight the complex interplay between currency fluctuations, central bank policies, and global market conditions.
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