Stocks plunge on US economy, yen appreciation; volatile price movements could continue

The Nikkei-225 stock average posted its second-largest daily decline in its history on the Tokyo Stock Exchange on Friday, as investor sentiment cooled rapidly amid growing concerns about the U.S. economic outlook and caution over the yen’s appreciation against the dollar. The volatile price movements could continue in the coming days.

“It was a ‘falling knife’ situation and investors had a hard time grasping it,” Kazuhiko Sawanobori, an executive officer of SMBC Nikko Securities Inc., told The Yomiuri Shimbun. He cited the investment aphorism, “Don’t try to catch a falling knife,” which suggests not investing in a stock or other asset during a downturn.

The pace of the decline was rapid. The Nikkei index opened at 9 a.m. Friday down 682 points from Thursday’s close, and just 10 minutes later the decline had widened to 1,500 points.

While traders in the dealing room of SMBC Nikko Securities were busy with their clients, the index fell by more than 2,000 points around 10am.

Chip-related stocks, which have led the stock market rally since the start of the year, fell sharply, with Tokyo Electron, a maker of semiconductor equipment, down about 12 percent. Shares in Advantest, a maker of test equipment, and Softbank Group, which owns a major British semiconductor design company, lost about 8 percent of their value, respectively. These three stocks alone caused the benchmark daily index to fall about 640 points.

To cut or not to cut

The sharp decline was triggered by two U.S. economic indicators released on Thursday. The U.S. manufacturing activity gauge for July fell from the previous month, while weekly initial jobless claims rose from the previous week, both worse than market expectations, fueling concerns about the country’s economic outlook.

Federal Reserve Chairman Jerome Powell suggested on July 31 that the Federal Open Market Committee (FOMC) could decide to cut rates at its September meeting.

However, some observers believe that “the market is waking up to a sense of caution that a delay in rate cuts could trigger an economic recession,” as Tomoichiro Kubota of Matsui Securities Co. put it.

The Dow Jones Industrial Average, a stock market index of 30 U.S. blue chip companies, closed at 40,347.97 on Thursday, down 494.82 points from the previous day.

Chip-related stocks fell as expectations for generative AI were tempered by the announcement by Intel, a major U.S. semiconductor company, of a plan to lay off about 15,000 people, a move that has spread to the Tokyo market.

BOJ Policy

The Bank of Japan’s monetary policy is also behind the stock market’s decline. The BOJ decided to raise interest rates at its monetary policy meeting on Wednesday, the second increase this year, which came earlier than most market participants had expected.

BOJ Governor Kazuo Ueda indicated at the press conference after the meeting that there is potential for further interest rate hikes.

The prospects of a BOJ rate hike and a Fed rate cut have led to yen buying, which will provide a relative operating advantage, leading to a rapid appreciation of the yen against the dollar.

Because a stronger yen lowers import costs, it will also temper the current rising commodity prices.

On the other hand, the revenues of export-related companies, such as automobile and machinery manufacturers, will be lower abroad when converted into yen.

On Friday, Toyota Motor Corp.’s stock fell about 4% from the previous day, and Nissan Motor Co.’s fell about 7%.

Many companies in the Nikkei 225 have overseas operations as their core business, making it more likely that a strong yen will lead to a fall in Tokyo stock prices.