Japanese Stock Markets in Freefall: Topix and Nikkei Under Heavy Pressure

The Japanese stock markets experienced a severe setback after the Topix Index plummeted significantly due to a broad sell-off. The index recorded its sharpest decline since April 2020, dropping by up to 3.9%. The primary factors behind this development were the struggling exporters and the pressure on real estate stocks due to the Bank of Japan's (BOJ) interest rate hike. The real estate sector was particularly hard hit, falling by as much as 8.1%. Automakers also suffered losses, down by 6.4%. Department stores, which had previously benefited from increased tourist spending due to a weak yen, also came under pressure. The Nikkei 225 Index, which underwent a technical correction last week, dropped by 3.5%. The yen rose to its highest level against the dollar since March after the BOJ raised interest rates on Wednesday and Jerome Powell, Chairman of the U.S. Federal Reserve, signaled that rates "could be lowered as soon as September." "The BOJ's rate hike raises two questions – one concerns the yen, which presents a headwind for exporters who had previously benefited, and the other concerns whether the economy remains stable," explained Tetsuo Seshimo, Portfolio Manager at Saison Asset Management Co., adding, "There are still many unknown factors." The BOJ had raised the policy interest rate on Wednesday from a range of 0% to 0.1% to around 0.25%. This prompted the nation's largest bank, Mitsubishi UFJ Financial Group, to increase its short-term interest rate, which serves as a benchmark for variable-rate mortgages and other loans. Comments from BOJ Governor Kazuo Ueda during the Wednesday press conference after market close reinforced the view that interest rates would continue to rise. "BOJ Governor Ueda seemed like a different person at yesterday’s press conference and was very combative," said Tomoichiro Kubota, Senior Market Analyst at Matsui Securities Co. "The previous assumption that rates wouldn’t rise and the yen wouldn’t appreciate has changed." This plunge follows record highs achieved by both the Nikkei 225 and the Topix earlier this year, driven by a weak yen and a global tech rally. These gains have now been reversed as the tech-driven boom stalled and concerns over the BOJ's monetary policy path grew.