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Today, the Japanese stock market plummeted, and the Nikkei 225 Index and the Topix Index fell all the way after opening. Among them, the Nikkei Index once plummeted by more than 7% after opening, falling by more than 2,500 points. The circuit breaker mechanism of the Japan Topix Index was triggered. The circuit breaker mechanism of Japanese government bond futures was also triggered.

In contrast, the relatively strong A-share market has become a temporary "safe haven" for market funds. The offshore RMB rose by more than 400 basis points against the U.S. dollar, reaching a high of 7.1251, the highest since January.

what happened?

Since the beginning of this year, the Japanese stock market has been the most popular capital market in the world. A large amount of international capital has poured in, pushing up the capital market represented by the Nikkei 225 Index. Now, the index has fallen 20% from its July high.

What exactly caused the series of drastic changes? The core of the problem points to the interest rate hike policy of the Bank of Japan. Prior to this, the Bank of Japan decided at the monetary policy meeting that ended on July 31 to raise the policy interest rate from 0% to 0.1% to around 0.25%. This is the first interest rate hike since the Bank of Japan ended its negative interest rate policy in March this year. The meeting also decided to gradually reduce the central bank's government bond purchases from the current monthly amount of about 6 trillion yen (1 US dollar is about 152.7 yen) to about 3 trillion yen per month from January to March 2026.

As we all know, the Bank of Japan has always been the largest buyer of the Japanese government bond market and the Japanese stock market. After this rate hike, the potential capital withdrawal and slowdown have also stimulated the sensitive nerves of many international investors. Investors have sold risky assets and the yen exchange rate has risen sharply. Members of the Bank of Japan's committee said that if the economic activity and price outlook proposed in April is realized and potential inflation rises, the Bank of Japan will raise the policy interest rate.

Meanwhile, investors are continuing to bet that the Bank of Japan will continue to raise interest rates. Minutes of the latest BOJ meeting showed one member said "the Bank of Japan must raise interest rates without delay at an appropriate time."

The yen has risen sharply

In addition to the huge impact on the stock market, the Bank of Japan's interest rate hike policy also has a very obvious boost to the yen. The USD/JPY exchange rate fell below the 146 mark for the first time since February this year, and the intraday decline once widened to 0.39%.

At that time, after the announcement of the rate hike, the Japanese stock market rebounded, with the Nikkei 225 Index and the Topix Index closing up 1.49% and 1.45% respectively on the same day. However, in just one trading day, the two major indexes fell sharply on Thursday and Friday.

Zhang Ming, deputy director of the Institute of Finance of the Chinese Academy of Social Sciences, and others said that in the past period of time, there has been a relatively obvious correlation between the rise of the Japanese stock market index and the depreciation of Japan's exchange rate against the US dollar. There may be two potential explanations for this. First, the depreciation of the yen helps improve Japanese corporate exports, thereby boosting the fundamentals of some Japanese listed companies. Second, the depreciation of the yen helps improve the global operations and investment performance of Japanese multinational companies.

"In other words, if the yen's exchange rate against the U.S. dollar turns from depreciating to appreciating in the future as Japan's monetary policy adjusts, then the rise in the Japanese stock market index driven by the depreciation of the yen may be difficult to sustain," said Zhang Ming and others.

The Fed's monetary policy dragged down the US stock market

It can be found that the monetary policies of central banks in recent years have disturbed the performance of the capital market to a great extent. In the middle of last week, the Federal Reserve announced that it would maintain the current interest rate. Subsequently, the US non-farm payroll data in July was far below expectations, which caused investors to panic about the economic recession.

Data released by the U.S. Department of Labor on the same day showed that the number of new jobs in the U.S. non-agricultural sector in July this year was only 114,000, and the unemployment rate increased by 0.2 percentage points month-on-month to 4.3%, the highest since October 2021. The relevant data triggered the "Sam Rule", an economic recession indicator, which defines that when the three-month moving average of the unemployment rate is more than 0.5 percentage points higher than the low point of the past 12 months, it means that the economy has entered the early stages of a recession.

Affected by this, the three major U.S. stock indexes fell collectively. The S&P 500 index closed down 1.84%, the Dow Jones Industrial Average closed down 1.51%, and the Nasdaq fell 2.4%.IntelThe stock price plummeted 26% overnight.

In addition, the company owned by Warren Buffett, the "stock god" that has attracted much attention from investorsBerkshireBerkshire Hathaway sold off its shares crazily in the second quarterapple, the number of shares held dropped from 790 million to 400 million shares, a reduction of approximately 49%.

Prior to this, Federal Reserve Chairman Powell was still trying to comfort investors, saying, "Policy makers are closer to a rate cut. If conditions are met, a rate cut may be made as early as the September meeting." However, Powell was very conservative about the extent of the rate cut. He said, "A 50 basis point rate cut is not something the Fed is currently considering. There is indeed a possibility of discussing a rate cut at this meeting, and the vast majority of policy makers support standing pat at this meeting." As inflation has fallen slower than expected, the Fed has maintained its target interest rate range at between 5.25% and 5.5% since the end of July last year, the highest level in 23 years.

BOC SecuritiesGuan Tao, the global chief economist, said that although the Fed has affirmed that the US inflation has made further progress in recent months, and has shifted from paying close attention to inflation risks to paying attention to both inflation and employment, giving the market a relatively positive signal, it cannot be ignored that the Fed is still facing the risk of insufficient or excessive tightening. It is worried that the rate cut will be too early and too much, leading to a rebound in inflation, and that the high interest rate will last too long, leading to a sudden and sharp deterioration in employment. Therefore, the meeting on the evening of July 31 was like "playing Tai Chi". Given the continued impact of high interest rates on the US economy, it is highly likely that the Fed will cut interest rates in September.