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Editor’s Note:

Global financial markets are shaken

Under the influence of the increasing risk of economic recession in the United States and the rising geopolitical risks in the Middle East, the global financial market fluctuated violently. On August 5, the Japanese and Korean stock markets suffered a "Black Monday", and the Nikkei 225 index closed down 12.4%, wiping out the gains since the beginning of 2024, and also setting the largest drop in points in history, surpassing the record of "Black Monday" in October 1987; the South Korean stock market also fell sharply, and the Korean Composite Index closed down 8.77%. In addition, Bitcoin fell sharply, once falling below $50,000 per coin during the session.

On August 5, global stock markets suffered a severe setback, with many stock markets experiencing a "Black Monday".

In the European and American markets, U.S. stocks continued to fall before the market opened, with technology and semiconductor sectors leading the decline. As of around 20:00 on August 5, Nasdaq futures fell by more than 4%, and S&P 500 futures fell by more than 3%. European stocks opened lower and fell throughout the day, with the Euro Stoxx 50 index falling by more than 3%, and major stock index futures in Germany and France both falling by more than 1%. The MSCI Asia Pacific Index fell by more than 6%, and is expected to wipe out all gains in 2024.

Stock markets in many parts of the Asia-Pacific region fell. The FTSE Bursa Malaysia Composite Index closed down 4.63% at 1536.48 points. Vietnam's VN Index fell 3.92% to 1188.07 points. Australia's S&P/ASX200 Index fell 293.60 points, or 3.70%, to 7649.60 points. The Japanese and Korean stock markets plummeted and collapsed at one point.

The Japanese stock market opened lower and continued to fall. As of the close, the Nikkei 225 index closed down 4451.28 points, a drop of 12.4%, at 31458.42 points. Japanese stocks led the decline in Asian markets, and the Nikkei index set the largest point drop in history, surpassing the record of "Black Monday" in October 1987. Since the opening on August 5, the Nikkei 225 index has triggered the circuit breaker mechanism twice. The Topix index fell 12.23%.

South Korea's stock market was also sold off. As of the close, the KOSPI index fell by 8.77% to 2441.57 points, exceeding the historical record for a single day. The circuit breaker mechanism was triggered and trading was suspended.

Many analysts pointed the finger at the market's concerns about the US economy and the disappointing performance of technology stocks for the massive sell-off in global stock markets. The Nikkei 225 index, which had been rising rapidly before, fell by nearly 10,000 points this year, sparking widespread discussion.

Sun Lijian, director of the Financial Research Center of Fudan University, said in an interview with a reporter from 21st Century Business Herald that there are three main reasons for this round of Japanese stock market crash. First, Japanese stocks were affected by the adjustment of U.S. stocks, especially the adjustment of the digital industry sector; second, Japan's interest rate hike triggered market profit-taking, financing, and short selling opportunities; third, investors are waiting for the end of profit-taking and exploring the opportunity to "buy on dips" in the next cycle.

What is the reason for the sudden global stock market crash? Among them, Japan has fallen into a technical bear market. What does this mean for Japan?

Japanese stock market "horrible moment"

As of Monday's close, both Japanese and South Korean stock markets were in a "free fall". Compared with the beginning of July, the Nikkei 225 Index has fallen by 23%, wiping out all gains this year; the South Korean Composite Index fell by 14.7% from the beginning of July, the largest drop since 2008.

What caused this round of "black storm" in the stock market? Zhang Jiantai, chief foreign exchange strategist for Asia at Mizuho Bank, said in an interview with a reporter from 21st Century Business Herald that the weak non-farm payroll data for July released by the United States last Friday has triggered concerns about a "hard landing" of the US economy. In addition, the Federal Reserve has a clear expectation of interest rate cuts, and the strong risk aversion sentiment in the market has been transmitted to the Japanese and Korean stock markets. Wang Xinjie, chief investment strategist of Standard Chartered China Wealth Management Department, further added to the reporter from 21st Century Business Herald that the trading pattern of the "recession trade" will have a great impact on Japan and South Korea, which are mainly export-oriented. Japan has more cyclical industries. As the recession expectations heat up, Japanese stocks will also be greatly affected.

Specifically, the heavyweight financial stocks, technology stocks, and automobile stocks among the Japanese stock components collectively pulled back, and the semiconductor sector became the "hardest hit area" of the decline, with leading companies Tokyo Electron, Scullin, and Senco falling by more than 10%.

In Sun Lijian's view, the Japanese stock market is linked to the US stock market, so the sectors that led the rise in the Japanese stock market are also similar to those in the US, with the focus on digital industries, integrated circuits and other sectors. Currently, TSMC, Nvidia, and South Korea's Samsung have all entered a deep adjustment. "As long as this sector adjusts, the stock market in the region where the leading companies are located will also see a big adjustment."

Wang Xinjie noticed that with the interest rate hike in Japan and the volatility in the US technology industry, a lot of funds have shifted from the Japanese semiconductor industry to bank stocks. He analyzed that in the short term, Japanese semiconductors, as part of the global semiconductor industry, have been affected, and against the backdrop of interest rate hikes, the loan-to-deposit ratio of the Japanese banking industry has the opportunity to achieve positive support. Combined with the long-standing price-to-book ratio management, increased dividends and repurchases, etc., stock market funds have gradually flowed to the Japanese banking sector.

In addition to external shocks, the "horror moment" of the Japanese stock market also has its own factors, the most direct of which is the adjustment of Japan's central bank's monetary policy a few days ago. Last week, the Bank of Japan announced a 15 basis point interest rate hike, which exceeded the market's expectation of 10 basis points. This is also the first interest rate hike since Japan lifted its negative interest rate policy in March this year.

"After several rounds of sharp rises, the Japanese stock market has remained at a high level. The Bank of Japan's interest rate hike at the end of July gave the market an opportunity to cash in profits, raise funds, and short sell." Sun Lijian told reporters that because global liquidity has continued to expand after the epidemic, the market has shown a trend of following the trend of investment.

Wang Xinjie told reporters that the appreciation of the yen after the rate hike also had a negative impact on the Japanese stock market. He said that the sharp appreciation of the yen not only affected the profits of export companies, but also had a significant impact on carry trades that used the yen as a source of financing. "Because of the appreciation of the yen, the costs of many trading parties that borrowed yen increased, causing many trading parties to be forced to close their positions to repay the appreciated yen."

Influenced by the Bank of Japan's previous continued loose monetary policy, there are two types of yen carry transactions in the financial market. One is to directly borrow low-interest yen, convert the yen into foreign currencies such as the US dollar, and invest in high-interest currency assets; the other is for overseas investment institutions to borrow low-interest yen to increase investment leverage, invest in the Japanese stock market, and bet on stock market gains and yen appreciation to make a profit.

Since 2023, the number of overseas investors attracted by the "Japan Special Valuation" has continued to rise. According to data recently released by the Japan Exchange Group Inc., in the Japanese fiscal year ending in March this year, foreign investors held stocks equivalent to 31.8% of the total market value of the Japanese stock market, the highest level since comparable data was available in 1970, when their shareholding ratio was only 4.9%. Individual investors currently account for 16.9%, and financial institutions account for about 28.9%.

However, as Japanese stocks plunge, overseas investors, who are the main buyers of Japanese stocks, are turning around. Hidetaro Yasuda, a market analyst at Tokai Tokyo Intelligence Lab, said: "Overseas investors bought heavily in the early days of 'Abenomics' due to the Bank of Japan's loose monetary policy. Now that the Bank of Japan's interest rate hike has become an important turning point, this trend may be reversing. They are not only selling futures, but also spot stocks."

At the same time, individual investors are also taking the opportunity to cash in. Tsutomu Yamada, a market analyst at au Kabucom Securities, said: "The recent sharp drop has led to an increase in margin calls, and individual investors' cash selling is expanding."

However, in Sun Lijian's view, this may only be a short-term flow of capital. He said that some investors may be waiting for the adjustment to end, realize the "profit and take it easy", and wait for the stock market to bottom out before entering the market.

Bank of Japan's calculations

Japanese stocks have gone from a rapid rise to a period of adjustment. Some analysts pointed out that Japanese stocks have entered a technical adjustment range.

Some analysts believe that it is not surprising that Japanese stocks will stop falling in the future, because the current prices of Japanese stocks are still relatively cheap. On August 2, stock analysts at securities companies calculated the overall price-to-earnings ratio (PER) of the Nikkei Stock Average based on expected profits for fiscal 2024 to be 14.9 times, which is lower than the average 15 times level of the long-term rising market since Abe's economics. Shingo Ide of the Japan Life Science Research Institute said: "From a valuation perspective, the current price is relatively cheap, but if the U.S. stock market falls sharply again, the Japanese stock market may be affected."

Unlike the decline in Japanese stocks, the yen-dollar exchange rate continued to soar. As of 18:00 Beijing time on August 5, the yen-dollar exchange rate was 142.13 yen per dollar, an increase of 11.6% from the beginning of July, the highest since early January.

Such a completely different trend is because "Abenomics" has long given rise to a situation where the Japanese stock market is improving and the yen is depreciating. Under the long-term loose monetary policy, Japan is an interest rate depression. Global investors can obtain low-cost funds through low interest rates and invest in the Japanese stock market. The interaction between incremental funds and the Japanese stock market is good, which further supports the improvement of the Japanese stock market.

However, Japan's interest rate hike will increase the cost of borrowing funds from Japan. Coupled with the volatility of Japanese stocks, the previous cycle of "yen depreciation and Japanese stocks improving" may be broken.

Sun Lijian analyzed to reporters that the capital that outflows in the short term due to the decline in Japanese stocks is not the long-term capital that the Bank of Japan is concerned about.

What the Bank of Japan values ​​is the inflow of long-term capital to help the Japanese economy out of deflation. The central bank's logic is that as long as the economy gets out of deflation, Japanese stocks will be more resilient to declines, thereby maintaining its own long-term capital and creating a new ecosystem led by Japan's new economy and solving Japan's industrial hollowing out problem.

Talking about "long-term capital", Sun Lijian said that after the establishment of the global production base of Kumamoto's smart industry, companies such as Nvidia and TSMC will invest in Japan. Japan wants to use this to rebuild the global value chain and keep long-term capital flowing into Japan. He said that it was because Kazuo Ueda believed that long-term capital was gradually entering Japan that he chose to raise interest rates before the Fed cut interest rates.

Sun Lijian further emphasized that the current primary goal of the Japanese government is to keep an eye on prices. "Raising interest rates will cause the yen to appreciate, which will effectively solve the problem of high imported inflation, achieve an increase in nominal income, and release domestic consumption power in Japan, thereby enhancing economic vitality." He believes that this will help realize the logic of the Japanese government, that is, once the actual income of the people rises, corporate performance will rise, thereby boosting domestic consumption and further achieving a virtuous cycle of rising prices and increased corporate valuations.

Another direct reason for the Bank of Japan to raise interest rates earlier was that the yen's continued depreciation led to rising import costs, and coupled with Japan's continued weak domestic consumption, the disadvantages of yen depreciation have long outweighed the benefits of depreciation. Wang Xinjie said that in the context of yen appreciation, the central bank's tone may turn to easing to a certain extent in the future, but with inflation still rising, this possibility is decreasing.

How long will the trend of “stock market falling, yen rising” last?

For now, the market is moving as the Bank of Japan planned, but the subsequent direction of the yen and Japanese stocks remains unknown. Ryota Abe, an economist at Sumitomo Mitsui Bank, said that the stronger yen will drag down the Nikkei index because corporate profit margins will decline, and many companies did not expect the yen to rise so sharply and suddenly.

"The short-term effect of the interest rate hike seems to be 'bad news' for Japan's export industries and the return of export-oriented enterprises, but it cannot be assumed that the interest rate hike will increase the financing costs of enterprises, because Japanese companies also have strong 'blood-making' capabilities in the market." But at the same time, Sun Lijian also expressed to reporters his concerns about the long-term phenomenon of "rising yen and falling Japanese stocks."

Sun Lijian believes that whether the current Japanese stock market will return to the situation when Japan's bubble economy collapsed depends mainly on two factors: first, whether the adjustment of the U.S. stock market will turn into a crisis. If the "bubble" in the IT sector of the U.S. stock market bursts, it will affect the development prospects of Japan's emerging industries and may even cause these emerging industries in Japan to shut down; second, if former U.S. President and Republican presidential candidate Trump wins the U.S. election, he is likely to advocate again moving the industrial chain and supply chain back to the United States, which will affect the direction of Japan's high-tech enterprises. If pessimistic, Japan will re-enter a deflationary economy.

In the short term, the poor US employment data and the market's dissatisfaction with the financial reports of US technology stocks have become the main reasons for this round of global stock market turmoil. However, Wang Xinjie believes that the future trend of the global stock market is not too pessimistic. "The market has ignored the US technology giants, such as Apple, whose earnings still exceeded market expectations. We believe that after all technology giants release their quarterly reports and public earnings data, the adverse effects brought by the financial reports may be cooled down." He said that the asset fluctuations caused by the current panic sentiment are still short-term effects. Looking forward to the future trend of the global stock market, we must continue to observe the performance of US macro data.

Nagai Shigeto, chief economist of Oxford Economics in Japan, also believes that the current stock market crash is an overreaction of the market. He told the 21st Century Business Herald reporter that the market is overly worried about the economic recession in the United States, and secondly, the yen has appreciated too much. As the market's excessive pessimism about the US economy gradually dissipates, the yen is expected to gradually depreciate. (Intern Xu Jiaye also contributed to this article)