Japan stock rally fades as fear returns to the markets
The Nikkei 225 ended down 0.7% on Thursday, snapping a two-day winning streak. Meanwhile, the yen strengthened 0.5% to 146 against the US dollar, after losing nearly 2% on Tuesday and Wednesday combined.
The benchmark index had soared in the past two sessions after a dramatic rout on Monday, as investors took some solace from the words of central bank officials.
On Wednesday, Bank of Japan (BOJ) deputy governor Shinichi Uchida said policymakers would not raise interest rates “when financial markets are unstable.” He sought to calm nerves after expectations that Japan would continue to tighten monetary policy sent markets into a tailspin on Monday.
Uchida said he believed the US economy would achieve a soft landing even as concerns had risen that the Federal Reserve had fallen behind in cutting rates.
Butthose fears, as well as a further jump in the value of the yen, still haunt the market.
“The potential for a broader US economic slowdown, misaligned global monetary policies and the bubbling geopolitical tensions in the Middle East cast long, ominous shadows across financial markets,” said Stephen Innes, managing partner of SPI Asset Management.
The volatility intheyen, which was at the heart of recent market turmoil, remains elevated, he added.
On Monday, the Nikkei plummeted by the most since 1987, sparking a broader global market sell-off.
The surge in the yen, which started when theBOJsignaled a hawkish tilt in monetary policy in recent weeks, forced many hedge funds and other investors to quickly unwind their yen carry trades, a popular investment strategy. That exacerbated the declines across global equity markets.
Although the BOJ deputy governor has played down a near-term policy hike, his words were “not meant to reverse the course of monetary policy,” said Alex Kuptsikevich, senior market analyst at FxPro.
In Japan, inflation has been close to the 2% targetset by the BOJ for almost two years, allowing the central bank to end a period of zero interest rates. Meanwhile, the Federal Reserve is grappling with slowing price growth and a cooling labor market, forcing a move to a long-term average rate around 2.8%.
The narrowing of the interest rate differentials, which had enabled the yen carry trade, could push the yen higher, he added.
If the US enters a recession and aggressive easing is pursued by the Fed, ”we would not be surprised to see (the dollar) fall to 120 (yen) or lower,” Masamichi Adachi, chief Japan economist at UBS, wrote on Wednesday.
Going ahead, the global trading environment remains unpredictable as many uncertainties hide in the shadows, Innes said.
“The US political election looms, potentially turning the markets into more of a chaotic mosh pit than a graceful waltz,” he added.
Analysts from UBS Chief Investment Office wrote on Thursday that, with just three months to go before Election Day, the race is too close to call.
“We suggest investors avoid making outsized portfolio moves for specific election outcomes at this stage,” they wrote.
In other Asian markets, South Korea’s Kospi closed 0.5% lower, also breaking a two-day stretch of gains. Taiwan’s Taiex finished down 2%. Hong Kong’s Hang Seng last traded flat.
The declining sentiment towards global markets due to rising concerns about a potential US economic slowdown and tight monetary policies in Japan could negatively impact various business sectors.
Investors closely monitor fluctuations in currency markets, such as the strengthening yen, as they can significantly impact businesses that rely on international trade.
