NIKKEI225 Reverses Course, Down on the Day Despite Global Stock Market Rally

The Japanese stock market battles with its concerns of interest rate hikes and a weakening yen.

The NIKKEI225 is down 1.24% this morning, while major global markets are in the green. The FTSE is up 0.27% and the NAS100 and DOW are up 0.05% and 0.37% respectively.

The NIKKEI225 is contending over BoJ monetary policy, a weak yen, and global stock market bullishness. The local stock market is expecting further hikes at a time when other major economies are experiencing monetary easing policies.

The index lost over 20% at one point after the second rate hike of the tightening cycle from the BoJ. Dovish comments from BoJ officials stating that further hikes were off the table while the capital markets are in turmoil helped the market recover some ground.

However, market sentiment is not completely free of the dark shadow cast by the grim reaper of interest rate hikes.

BoJ Policy & and Strong Yen

However, BoJ policy aimed at strengthening the yen has also spooked investors. To fight a weakening yen, the central bank has enacted a bond buyback reduction. The outline for reducing purchases has already pushed bond yields higher.

Bond investors are seeing more attractive yields for JGBs, leading investors to switch some stock holdings for bonds.

While foreign investors are also more likely to be attracted by rising bond yields, they will also be weary of a weakening yen. The reduction in bond purchases and the interest rate hike can be seen in virtue of currency protection intervention.

Inflation is only slightly on the rise, but the BoJ narrative, echoed by government officials, is that a weak yen will cause imported inflation. The effect on the yen has been notable, with the USD/JPY dropping over 7% after the rate hike on July 31.

A strong yen reduces the attractiveness of Japanese stocks for foreign investors. We have seen how foreign purchases of Japanese stocks has fallen by over ¥1,200 billion over the past two months.

A strong yen makes stock valuations less attractive in the foreigner’s currency. Add to that, foreign investor who bought Japanese stocks with the USD/JPY at 155.00 can now sell the stocks and buy back their dollars at 147.00

This forex trade becomes even more appealing the lower the FX rate goes. If stocks are also falling in price then it’s a way to cover losses or even take home a profit.