Monday saw heavy selling pressure on Japan’s benchmark index, the Nikkei 225, as Tokyo’s barometer fell by about 15% throughout the trading session. As Asia-Pacific markets carried on with last week’s sell-off, Japanese stocks confirmed a bear market. The Nikkei fell about 28% from its 52-week high, which was reached in mid-July 2024.
Breaking news: Japan’s Nikkei 225 index dropped more than 12% as global markets were rattled by the prospect of a US recession https://t.co/52w7B8ZA4n pic.twitter.com/PRmkSSLhuR
— Financial Times (@FT) August 5, 2024
Major Stocks See Significant Losses
Stocks from Mitsui & Co., Kawasaki Kisen, Mitsubishi, Daikin Industries, Fujitsu, Kubota, Sumitomo, and other companies plunged up to 23% during Monday’s session, which contributed to the 5,000-point decline in the Nikkei. In addition, Japan’s Topix market index had a decline of around 13%, staying close to its 52-week lows.
Traders were concerned about how a stronger yen might affect Japanese businesses following the Bank of Japan’s (BoJ) indication that more rate increases may be forthcoming. Companies with offshore earnings and exporters would suffer from a strengthening yen. The yen also gained ground versus the dollar on Monday, reaching its highest level since January. It was last trading at 143.10.
Impact of a Stronger Yen
Many market participants have also been forced to unwind the highly popular trading method known as the yen carry trade due to the Japanese currency’s quick gain. With the selloff in global shares, attention has turned to the so-called Yen carry trade.
Carry trading, which involves borrowing money from a country with low interest rates and a weaker currency and reinvesting it in assets of a different country with a greater rate of return, is a very popular trading method. It has been a major source of liquidity in the world currency market.
Yen Carry Trade Unwinding
The yen has risen to its highest level versus the US dollar since March as a result of the Bank of Japan’s decision to boost interest rates. According to Vikram Chhabra, Senior Economist at 360 ONE Asset, this has caused the unwinding of the yen carry trade, which involves borrowing cheaply in yen and investing in higher-yielding currencies or assets.
The recent global sell-off in equities has been exacerbated by disappointing US jobs data and the turbulence in the Japanese market. This has led to collateral damage in equity indices worldwide, including Indian stock markets. The Japanese carry trade is not the sole reason for the market’s meltdown, as concerns of rising Middle East tension, jitters to US rate cut expectations, and rich valuations of Indian stocks also contributed.
Global Market Repercussions
The fall in US job creation in July and the rise in the unemployment rate are also under threat. Geopolitical tensions in the Middle East and the unwinding of the Yen carry trade are also contributing factors. Some analysts believe that the recent correction was warranted for Indian stock markets, and investors should consider buying dips and accumulating the stock in a staggered manner amid the volatility. The sell-off is short-term volatility by profit booking and is not indicative of a long-term panic mode set in Indian equities.
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