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Less than a month ago, on July 11, a pedestrian in Tokyo, Japan, passed by the Nikkei average display screen, which had just hit a record high of 42,224.02 points that day. Image source: Visual China.

Author | Wen Shijun

Editor | Wang Weikai

Produced by | Prism·Tencent Xiaoman Studio

The Japanese stock market entered a black August.

On August 5, the Nikkei 225 plunged sharply, breaking through the 32,000-point mark to 31,156.12 points. There was a slight correction at the close, but the decline was still as high as an astonishing 12.4%, directly evaporating 4,451.28 points from the previous trading day, setting a record for the largest single-day decline in the Nikkei index.

This is the continuation of the "free fall" of the Japanese stock market following the "Black Friday" on August 2nd, the previous trading day.

Last Friday, the Nikkei average opened at 37,444.17 points, down 5.81% in a single day, and closed at 35,909.7 points, setting the largest single-day drop since the outbreak of the epidemic in 2020. However, on this trading day after the weekend, the panic-stricken sentiment of fleeing the top directly caused a stampede in the market.

Just last Wednesday, July 31, the Nikkei average closed above the iconic high of 39,000 points. In just three trading days, the index has dropped by 7,643.4 points. The 19.6% drop in three trading days has almost wiped out all the growth of this round of market since the end of 2023.

The Nikkei Average reflects the stock price trends of the 225 stocks with the highest trading volume and liquidity on the core main board of the Tokyo Stock Exchange (Tokyo Stock Exchange Prime). It has been compiled since September 7, 1950 and is the most important reference indicator for the prosperity of the Japanese stock market.

On February 22, the Nikkei average closed at the iconic 39,098.68 points, officially breaking through the historical peak of the bubble economy period.

On December 29, 1989, the Nikkei average rose to 38,957.44 points during the trading session and closed at 38,915.87 points. This was the last trading day of the 1980s, and it was also the turning point when Japan's "gold-filled" bubble economy era reached its peak and then fell.

After setting a new record in February this year, the Japanese stock market continued to run at a high level. Although it fell back in April, the Nikkei average index remained above 37,000 points. By July 11, it once reached 42,426.77 points and closed at 42,224.02 points, setting a new record in the 70-year history of the Nikkei average index.

Confidence is often the most fragile at this time, and the market can no longer withstand any disturbance. But more importantly, behind the stock market fluctuations, Japan's economic policy has once again reached a critical point in its historical turning point.

 A warning to supporters of Japan's "financial normalization"

On July 31, the most critical internal negative factor for this round of sharp decline appeared. The Bank of Japan's monetary policy meeting that ended that day decided to raise Japan's policy interest rate from the original 0% to 0.1% to around 0.25% from August 1, returning to the level of December 2008.

The Bank of Japan has been planning to raise interest rates for a long time. Before that, the 0% or even negative interest rate policy that continued for many years after the bubble economy was implemented to achieve Japan's "financial normalization" was a major trend in Japan's business community and even in public opinion.

However, there are also many voices against the rate hike. The Bank of Japan is also wary of the stock market turmoil that may be brought about by the rate hike, as well as the long-term, unknown negative impact on economic development. Although it intends to raise interest rates, it is also looking for the right time window. After all, this historic economic policy shift not only tests the wisdom of the trader, but also may fail after a long-term plan.

The Bank of Japan has been paving the way for rate hikes and trying to prepare for possible public opinion storms: some commentators in Japan believe that "if the Bank of Japan pretends to be forced to take action due to the depreciation of the yen to set the stage for the normalization of financial policies, it can be said that this is a very smart tactic."

In fact, the depreciation of the yen and the resulting price increases are also accumulating the determination of Japan's private sector and decision-making elites to raise interest rates. After all, the policy logic of "inflation-interest rate hike" is a common strategy in other countries that have "financial normalization."

Bank of Japan Governor Kazuo Ueda has previously hinted several times that Japan will lift its negative interest rate policy.

Not long ago in April, Ueda Kazunan said at a conference in Washington, the United States that if the depreciation of the yen and the rise in prices "have a huge impact that cannot be ignored, it is possible to adjust financial policies."

This level of statement actually represents room for a shift in monetary policy in Japan, which is accustomed to making ambiguous and implicit statements, or the door to raising interest rates is slowly opening.

But for the hot Japanese stock market at the time, round after round of increases soon overwhelmed this possible risk factor. The game of passing the parcel continues.

In other words, the hot Japanese stock market has also emboldened policymakers to "turn hawkish" and raise interest rates. In the field of monetary policy, hawks generally prefer to withdraw from quantitative easing policies and curb inflation by raising interest rates.

Shortly after the Nikkei average hit a record high on July 11, Japanese Prime Minister Fumio Kishida said at the summer forum of Keidanren (Keidanren, the Federation of Japanese Economic Enterprises) held in Karuizawa, Nagano Prefecture, a tourist destination in Japan, on July 19: "The normalization of financial policies will promote the transition of the economic stage."

Judging from his speech, he already believes that Japan will shift from the previous deflation to a "growth economy" and said that "further neutrality of financial policies will be promoted."

Although he also stressed in his speech that "one to two years is not enough" to reverse the deflation that has lasted for 30 years since the bubble economy, Japan's interest rate hike is already a foregone conclusion.

On July 31, the Bank of Japan held a monetary policy meeting and released a historic interest rate hike policy. Bank of Japan Governor Kazuo Ueda said at a subsequent press conference that the impact of the interest rate hike on economic prosperity would be "small." As a Japanese official, his statement was very firm: if the economy and prices "meet or exceed expectations," the interest rate hike will continue.

Before becoming the Governor of the Bank of Japan in April 2023, Kazuo Ueda had been working in academia and had taught at Osaka University and the University of Tokyo. In 1980, Kazuo Ueda graduated with a Ph.D. from the Massachusetts Institute of Technology and studied under former Federal Reserve Vice Chairman Stanley Fischer.

The latter's students also include former Federal Reserve Chairman Ben Bernanke, former European Central Bank President Mario Draghi, former Reserve Bank of Australia Deputy Governor Guy Debelle, former US Treasury Secretary Lawrence Summers...

As a member of the "MIT school" of central bank, Kazuo Ueda believes in Keynesianism, which believes in using policy intervention to make up for market deficiencies. This is the theoretical basis of Kazuo Ueda.

Japanese large companies often negotiate wage increases with their employees in the spring. According to data from the Japan Labor Union Federation (Japan Labor Union Federation), Japan's wage increase rate in spring 2024 is 5.28%, the first time it has exceeded 5% since 1991.

At the aforementioned press conference, Kazuo Ueda specifically said that this year Japan's large companies achieved a "historic" wage increase. If the wage increase is transmitted to small and medium-sized enterprises, and then a virtuous development trend of rising wages, prices, and interest rates is achieved, subsequent interest rate hikes can be fully justified.

This is the Keynesian's roadmap for Japan's financial normalization.

Of course, overall, there may be distortion and dislocation between the short-term abnormal fluctuations of the stock market and the long-term economic development trend. But the big plunge of the Japanese stock market has undoubtedly given this official who has walked out of his study, as well as many Japanese "financial normalization" supporters behind him, a warning.

Since 2024, especially since April, the changes in the Nikkei 225 index have been highly correlated with the yen exchange rate. Image source: drawn by the author, data extracted from Wind

Contrary to Japan's interest rate hike trend, expectations for a rate cut in the United States are growing

Of course, this stampede also has its fundamental logic.

Most directly, the export growth driven by the depreciation of the yen may shift as the Bank of Japan raises interest rates and the yen appreciates.

Automobiles are Japan's largest export commodity, and automobile-related employment accounts for 8%. Taking Japan's iconic automobile companies as an example, in the "stock market crash" on August 5, automobile stocks were almost wiped out.SubaruThe single-day decline was 18.34%, Honda fell 17.77%, Mazda fell 16.79%, Nissan fell 14.48%, and Toyota fell 13.66%. Toyota is the company with the highest market value in Japan, and its market value evaporated by US$32.866 billion (equivalent to RMB 234.476 billion) in one day.

Buffett reduced his holdings due to the decline in international markets, especially US technology stocks.appleAffected by factors such as the coronavirus, Japanese technology companies whose stock prices had soared also fell sharply on August 5. SoftBank Group, which had just recovered, fell 18.66% on August 5.Tokyo ElectronThe decline was 18.48%, Advantest fell 15.84%, and Disco Inc fell 15.70%.

Even before that, because of Buffett'sBerkshireThe Japanese general trading company stocks that Berkshire Hathaway led the way in buying also benefited equally.

In the big drop on August 5, all seven trading companies in the Nikkei 225 fell. Taking the five major companies as an example: Mitsubishi Corporation fell 14.11%, Itochu Corporation fell 14.53%, Mitsui & Co. fell 19.87%, Sumitomo Corporation fell 17.68%, and Marubeni fell 18.30%.

Those who follow the trend to buy are often also those who follow the trend to sell.

Although all 225 stocks in the Nikkei Stock Average fell on August 5, the declines were relatively smaller in stocks related to basic necessities.

For example, SoftBank and KDDI, Japanese telecom operators, Otsuka, a pharmaceutical company, Meiji and Kirin, a food company, Tokyo Gas, an infrastructure company, and retail companies.AEON, the decline was all within 5% - this was already an "excellent" performance in a "bloodbath" market.

The biggest negative factor in the international market comes from the US economic expectations and monetary policy.

On August 2, the July employment data released by the United States showed lower-than-expected growth, and the confidence of the market, which was supported by the continued growth of the US economy, began to waver. In addition, the technology stocks that had continued to rise in the previous period were already in an absolutely overvalued state, and the US technology stocks had also shown signs of a stock market crash:

From July to the latest closing date,IntelThe stock price fell by 30.35% and ARM fell by 28.57%.QualcommDown 20.36%,ASMLA drop of 21.54%, even at the forefront of the AI ​​waveNvidia, AMD also fell by 13.7% and 15.97% respectively.

For the global stock market, the share prices of these cornerstone stocks of this round of technology stock market are collapsing. It is inevitable that the Japanese stock market will be implicated.

A more dramatic scene is that just a few hours after Japan released its hawkish monetary policy, the Federal Reserve announced on July 31, Eastern Time, that it would continue to maintain interest rates at 5.25% to 5.5%. Apart from key data, the wording of the statement was as ambiguous as before, but Fed Chairman Jerome Powell clearly expressed his "dovish" interest rate cut stance at the press conference.

Powell's speech is consistent with the underlying logic of Ueda Kazuo, but the direction is opposite. Powell said that a rate cut is "getting closer and closer" and if inflation data continues to be encouraging, a rate cut in September is "on the table."

Japan is raising interest rates at a time when the United States is about to choose to cut interest rates. The cost of Japan's desired "financial normalization" may be more than just a stock market crash.

(The data cutoff time is 18:00 Beijing time on August 5, 2024. It is based on market public information analysis and is not intended as investment advice.)