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Hu Huaxiong (Securities Times reporter)

The recent plunge in the Japanese stock market has attracted the attention of global investors. In addition to the impact that some investors who invest in cross-border ETFs may suffer, the collateral impact of the Japanese stock market plunge under the linkage of global stock markets will also more or less affect the returns of related investors. This cannot but mention the "ripple effect" in the stock market.

The "ripple effect" in the stock market in the general sense refers to the phenomenon that a large fluctuation in a market has a linkage impact on other markets. It can be used to explain the problems of global stock market linkage and large fluctuations.

A review of recent stock market trends shows that this round of "ripple effect" in the Japanese stock market began with the Bank of Japan's interest rate hike, but the market did not react much at the time. The Nikkei 225 index even rose by 1.49% on the day of the rate hike. However, Japanese stocks began to turn downward on subsequent trading days, and the decline increased day by day until the largest closing decline in recent years occurred on Monday this week. Stock markets in other countries and regions also followed suit.

The "ripple effect" caused by the current decline in the Japanese stock market also has some of its own temporal and spatial characteristics.

On the one hand, there is the "ripple effect" of Japanese stocks themselves. The Bank of Japan's interest rate hike is a "test the waters". At the beginning, many investors did not pay much attention to it and it did not cause much splash. However, as time went on, more and more investors realized the impact of the policy shift, which led to the selling of Japanese stock investors, which in turn caused the Japanese stock market to fall faster and harder.

On the other hand, the decline of Japanese stocks has brought about a "ripple effect" on the stock markets of other countries and regions. Since the Japanese economy and Japanese stock market are relatively large, their large fluctuations will naturally be transmitted to other global markets. From the current situation, the stock markets of some countries and regions in Asia, which are in the same region as Japan, are the first to be hit. Among them, the Korean stock market, which has some similarities with Japan's advantageous industries, has been particularly affected, with a very fierce decline, while the impact on European and American stock markets has been relatively small for the time being. In addition, the impact on the A-share market and the Hong Kong stock market has also been relatively mild.

As for the reasons for this "ripple effect", the policy shift of the Japanese monetary authorities is one of the triggers, and the stage of Japanese stocks has exacerbated this effect. Before this round of plunge, Japanese stocks were generally in an upward channel, and the Nikkei 225 index once rose by more than 20% this year. In the past few years, the Nikkei 225 index has also risen mostly. The long-term rise has accumulated a lot of profit-taking, and the concentrated selling of profit-taking has accelerated the change of market expectations.

The author believes that the "ripple effect" of the current stock market should not be ignored. Looking back at history, the last "ripple effect" that caused huge global damage occurred more than ten years ago during the subprime mortgage crisis and the global financial tsunami. At that time, some subprime borrowers in the United States could not repay their loans on time, but a chain reaction ensued, with some subprime mortgage institutions going bankrupt, and some banks and insurance companies subsequently closing down, which in turn led to a continuous plunge in the U.S. stock market and other global stock markets, and ultimately plunged the global economy into a deep recession.

Given the "ripple effect" in the stock market, facing the current situation, all economies need to make careful assessments, prepare adequate toolboxes to deal with it, and make preparations in advance for extreme market conditions to minimize related shocks.

The opinions expressed in this column are solely those of the author.