Historic Crash on Japan’s Stock Markets – Nikkei Posts Largest One-Day Loss Since 1987

The Japanese stock markets experienced a massive plunge on Monday, the strongest since Black Monday in 1987. This crash was driven by the global stock market collapse last week, economic concerns, and worries about the unwinding of investments financed by the cheap yen. The Nikkei Index lost an impressive 12.4%, after disappointing U.S. labor market data heightened fears of a possible recession and the yen climbed to a 7-month high against the dollar. In percentage terms, this is the largest drop in the index since the crash in October 1987. The sell-off was led by Japanese bank stocks, driving the Nikkei into a bear market—a decline of 27% from the peak of 42,426.77 on July 11. Since this peak, the Nikkei had shed 113 trillion yen (792 billion USD) in market value by the close of trading on Monday. "The rapid appreciation of the yen is not only putting pressure on Japanese stocks but also leading to a massive unwinding of a significant carry trade—investors have used yen-borrowed capital to purchase other assets, mainly U.S. tech stocks," explained Kyle Rodda, Senior Financial Market Analyst at Capital.com in Melbourne. "We are essentially seeing mass deleveraging as investors sell assets to cover their losses." The Nikkei lost 4,451.28 points on Monday, marking the largest single-day point loss ever, surpassing the loss of 3,836.48 points on October 20, 1987, when the global stock market crash also impacted Japanese markets. Japanese Finance Minister Shunichi Suzuki stated that the government is observing the markets with "serious concern." "It is hard to say what is behind the stock decline," Suzuki told reporters. Most analysts agree that neither interest rate expectations nor economic data could explain the severity of the sell-off. The decline may have been driven by the rise of the yen, whose nearly zero percent short-term yields and steady depreciation had made it a financing currency for billions of dollars in investments for years. The yen recently rose 2.5% to 142.96 per dollar and has increased by 14% in less than a month, partly triggered by the Bank of Japan's interest rate hike last week and the unwinding of yen-financed carry trades. "In short, not only the currency but the entire 'value' trade in Japan, which has dominated our market for two years, is being unwound," said Richard Kaye, portfolio manager at Comgest in Tokyo. GLOBAL SELL-OFF U.S. stocks also sold off for the second consecutive day on Friday, and the Nasdaq Composite Index confirmed that it is in correction territory after the labor market report fueled fears of a recession and expectations of a significant interest rate cut by the Federal Reserve in September. U.S. stock futures fell sharply, indicating another sell-off in Wall Street shares. "I think the concerns about the U.S. economic slowdown were too great, but the market got nervous after the Bank of Japan’s rate hike, thinking the domestic economy was not strong enough to justify the rate hike," said Tomochika Kitaoka, chief equity strategist at Nomura Securities. The banking sector plunged 17%, making it the worst-performing sector among the 33 industry sub-indices on the Tokyo Stock Exchange. Chip equipment maker Tokyo Electron fell 18.48% and was the biggest drag on the Nikkei. Fast Retailing, the owner of the Uniqlo brand, lost 9.59% and tech investor SoftBank Group sank 18.66%. The broader Topix Index lost 12.2% to 2,227.15, the lowest level since mid-October, and also moved into bear market territory as it recorded a 25% decline from its July 11 peak.