Quieter Trading in Asia After Global Selling Pressure

Asian markets regained some composure on Tuesday after a phase of frantic selling worldwide was triggered by concerns about a potential US recession. In Japan, where the highest losses were recorded on Monday, stocks recovered significantly. The Nikkei 225 index rose by 11 percent after plunging by 12.4 percent the previous day. This was the largest single-day points loss for the index, even greater than the crash on Black Monday in October 1987. In South Korea, where stocks temporarily fell by more than 10 percent on Monday, the markets gained back about 4 percent. The trigger for the turbulence in the stock markets was found in Japan last week, when concerns about the state of the US economy were amplified by worries about the impact of a rapidly strengthening yen on corporate profits. On Friday, a report on the US labor market showed a significant decline in hiring, which set off a selling spree in the US markets. The widespread panic continued on Monday as fears arose that the Federal Reserve might have waited too long to cut interest rates, potentially jeopardizing the strength of the US economy. On Wall Street, the S&P 500 fell by 3 percent, marking the largest daily loss since September 2022. The Fed is expected to lower the interest rates, which are at a more than twenty-year high, later this year. Developments in Japan were complicated by a contrasting interest rate policy. Last Wednesday, the Bank of Japan raised its key interest rate by a quarter-point. This was only the central bank’s second rate hike since 2007. After years of keeping rates low to stimulate prices and consumption, inflation has risen to a level where central bankers decided to begin raising rates. The prospect of higher rates led to a strengthening of the yen, a trend that could be beneficial for the Japanese economy in the long run but is likely to weigh on corporate profits, especially for large companies reliant on exports. The currency appreciation unsettled investors, leading some to fear that a stronger yen could spell the end of a rally in Japanese stocks that had lasted more than a year and was driven by a weakened currency. The strengthening yen also undermined some global investments made at a cheaper yen, acting as a catalyst for broader sales in already nervous markets, given the risk that stock prices had risen too high too quickly. A popular strategy among some investors involved borrowing in yen and then investing in markets like the US. As the strength of the dollar began to wane this year, the gains from this trade reversed. On Tuesday, the yen strengthened and traded at around 145 to the dollar, compared to up to 141 the previous day. Although the chain reaction of a stronger Japanese currency and falling stocks seems to have calmed, analysts continue to expect significant market fluctuations until there is more clarity about the direction of the US economy.