Japan's stock market crashes

Good mother of Allah! Strap in, it's going to be a wild ride.

Japan's stock market crashes Chart R

Aug 5, 2024

After last week’s disappointing jobs report, in which US unemployment hit its highest level in more than two years, investors are once again dumping stocks, as a flurry of “risk off” trading activity reverberates around global markets.

Most notable of this morning’s flashing red charts is that of the Nikkei 225, Japan’s flagship index, which has closed down 12.4%, its worst one-day showing since 1987. That’s a remarkable decline when you consider all that has happened in that time: Japan’s asset bubble bursting in the early 1990s, the dot-com crash, earthquakes, the global financial crisis, nuclear meltdowns, and COVID-19. It builds on the nearly 6% decline seen on Friday, which means that those two days have now wiped out all of the gains — and then some — that the index had notched in 2024.

A rapid appreciation in the Japanese Yen against the US Dollar appears partly to blame for the Nikkei 225’s outsized decline, as investors unwind the “carry trade” which had seen investors borrow in Japan, where interest rates have been very low, and re-invest elsewhere. Last week’s rate hike from the Bank of Japan turned that trade on its head.

When America sneezes...

Although Friday’s jobs report came with a large weather-related asterisk, the fundamental deterioration appears to have been enough to spook investors, with many of the more successful trades this year unwound quickly in the last two trading days. European stocks are also down, with the STOXX 600 off 2.3% at the time of writing, while shares of big US tech stocks are changing hands at significantly cheaper prices in early market trading, with AI darling Nvidia currently down more than 6%.

Today’s sharp sell-off follows the most volatile day of the year last week, as the stock market’s “fear gauge” (the VIX) rose to its highest level since the pandemic at 47 on Monday.