In a development that caught market analysts napping, the Japanese stock market on Monday the 5th of August slumped by 12.4%, the highest slump in 37 years, while Japan’s Nikkei 225 index suffered the largest single-day point drop in its history. The slump was driven by rising interest rates in Japan, the Yen’s value surge, and fears of a possible recession in the United States.
The Japanese stock market which is better known as the Tokyo Stock Exchange (TSE) as a history dating back to 1878 making it one of the oldest stock exchanges in the world. Located in Tokyo, Japan the TSE is one of the largest stock exchanges in the world and is home to over 2,000 listed companies including some of Japan’s most well-known brands such as Toyota, Honda, and Sony.
In what some analysts said might be a market correcting itself, investors had been relying on the historically low Japanese interest rates to fund risky investments. With the decision of the Bank of Japan to raise interest rates while indicating further rate hikes, many investors decided to play safe and liquidate their investments instead of having to deal with paying higher interest rates for their risky investments.
Japan has had a long history of low interest rates which it has been able to maintain by an ultra-loose monetary policy that includes negative interest rates to stimulate economic activities. Due to the high productivity in Japan, they have also been able to keep inflation rates low while the savings culture of the Japanese people ensures that there is a large domestic pool of funds available for investments.
While the appreciation in the value of a country’s currency is normally indicative of a strong and growing economy, for Japanese companies that depend heavily on export trade for most of their revenues, it’s not exactly good news as a stronger Yen makes their products more expensive in the international market and thus less competitive, leading to expected lower sales revenues which resulted in investors dumping their shares on the TSE.
Fears of a pending recession in the United States were also a major factor in what caused the market slump on the TSE as the United States is Japan’s biggest export destination and a recession in the United States will translate to fewer purchases from Japanese companies thus the bearish attitude of investors in the Japanese stock market.
Trading in the Japanese stock market had to be suspended to prevent panic selling having triggered circuit breakers built into the system to contain severe market drops. The slump in the Japanese market also caused a panic in the South Korean market where the main market closed 9% lower before their circuit breakers were activated to prevent further losses.
The shockwaves also reverberated through Taiwan where their stocks plunged by more than 8% which has been the highest single-day drop in the history of the Taiwanese market. Shares of Taiwan Semiconductor Manufacturing Company, the world’s largest chipmaker also fell by almost 10%. Outside Asia, the shockwaves were also felt in the European markets resulting in sharp declines in the All Share Indexes at the start of trading as was the same with the U.S markets.
While it’s not unusual for a slump in any of the leading Exchanges to reverberate to other Stock Exchanges all over the world, the slump triggered by the TSE took a new twist which resulted in Bitcoin losing 15% of its value and Ethereum dropping 22% in a single day. This market reaction raises pertinent questions about the evolving nature of the relationship between traditional assets like stocks/bonds and seemingly unrelated assets like cryptocurrency.
This development can be traced to large institutional investors and multi-strategy hedge funds who have started embracing investments in cryptocurrency to diversify their portfolios. The integration of Bitcoin into the broader financial system was facilitated by the Bitcoin-Exchange Traded Fund which is traded on stock exchanges like other stocks. As a result of this, the movement of crypto and traditional asset prices has become more synchronized.
The realities of the global village that we live in have never been this daunting, as the mere expectations of job losses in one country can send the stock market crashing across another continent and cryptocurrencies which are borderless and hitherto ignored by the financial system’s establishment has now been warmly embraced by the same establishment.
The interdependence of various markets across the world has never been more obvious with the embrace of digital technology that continues to blur the lines between territories, regions, countries, and continents thus reinforcing the saying that “In the global village, everyone is a neighbour and everyone’s business is everyone’s business”.
Oshobi, a development economist, management consultant, and author writes from Lagos.