Markets crashed last week as fears about the health of the U.S. economy, tech sector and more spread across the globe, and no market was hit harder than Japan.
Japan's main stock indexes suffered their worst two- and three-day declines since the 1950s starting Thursday, and analysts said the declines can't be fully explained by the same factors affecting other countries.
Japan had one unique factor that exacerbated the problem: the depreciation of its currency, which had been fueling corporate profits and company values, began to rise at an alarming rate.
The turmoil is threatening Japan's longest rally in stock prices in decades. Many reasons have been cited for the strong performance of Japanese stocks that began early last year. Warren Buffett's Berkshire Hathaway has expressed optimism about Japan as an alternative investment destination to China. The Tokyo Stock Exchange has stepped up efforts to encourage companies to return profits to shareholders.
But the yen's strengthening last week erased much of the gains Japanese stocks have made this year, forcing investors to reassess whether the much-celebrated revival of Japanese stocks is the result of a weaker yen rather than an underlying structural change.
“Why has the sharp decline been so bad in Japan compared to other markets? The yen is in the top echelon,” said Stefan Anrick, senior economist at Moody's Analytics in Japan. “Japan's rally ultimately has a lot to do with the yen, and the events of the past few days are a good reminder of that.”
A weaker yen has played a key role in supporting share prices of Japan's biggest companies in recent years, particularly exporters whose earnings overseas have become more valuable. Many of Japan's biggest global brands, including Toyota Motor Corp., have reported record profits. That has attracted investor funds and helped push Japan's stock indexes to record highs.
The yen's depreciation over the past few years has been driven primarily by the wide interest rate differential between Japan and the U.S. As U.S. interest rates have soared, Japanese rates have remained below or near zero, prompting investors to seek higher returns outside Japan.
That trend began to reverse last Wednesday when the Bank of Japan unexpectedly raised its key interest rate for the second time in nearly two decades. The move, combined with signs that a rate cut by the U.S. Federal Reserve was imminent, sent the yen strengthening sharply.
The yen, which was trading at around 161 yen to the dollar just a few weeks ago, was below 150 yen as of Friday morning.
The yen's breach of the 150 yen to the dollar mark, which traders saw as a turning point, exacerbated panic among investors who worried that companies would be forced to cut their profit forecasts.
The Topix, a broad gauge of Japan's economy, fell 6.1 percent on Friday, its worst two-day performance since the 2011 earthquake and tsunami.
After growing selling pressure, the Tokyo market's open on Monday was seen as a test of whether confidence in Japanese companies will endure even without the support of the yen.Historically, Japanese investors have seized the opportunity during foreign-led market sell-offs, keeping prices low.
The problem was that this time, buyers were idling. Japan had a selling frenzy that sent another benchmark index, the Nikkei, down its biggest one-day drop on record, evoking the global stock market crash of October 1987 and leading some to call it “Black Monday.”
“Despite all of this reform and stabilization and the Tokyo Stock Exchange's push to improve returns on capital, we're not seeing any buying from Japanese investors,” said Jesper Koll, director of financial-services firm Monex Group Inc. “It's becoming an eerie situation.”
Japanese stocks began to recover on Tuesday, with the Nikkei rising 10.2%, as some traders speculated the market had regained some composure after pricing in a stronger yen.
A 43-year-old Japanese investor, who asked not to be named, said he owned a cram school near Tokyo and bought shares on Monday despite feeling “scared and wanting to run away.” When the stock price recovered, he pocketed the equivalent of about $2,700 and used it to take his children to play centres.
The question that no one can answer, naturally, is whether the bubble of a weak yen and high stock prices has completely burst.
Japan's stock indexes continued their relatively modest recovery on Wednesday, with the Nikkei closing up 1.2 points. 1.2 percent and the TOPIX rose 2.3 percent. Japan's stock indexes are largely back to their levels at the start of the year.
Nomura Research Institute suggested in a report on Wednesday that a weak yen began to boost stock prices in early 2023, when the Nikkei average was hovering around 26,000 yen. That means stock prices could fall another third from current levels if all of the yen-related gains are reversed, which would be a painful adjustment for many companies and their investors.
Joy Yang, head of Asian economic research at hedge fund Point72, said he would hold off on passing judgment on Japan's economy and stocks until markets calm and some key indicators are released. Economic output figures due next week, for example, will show whether newfound inflation in Japan helps stimulate growth, he said.
“For now, we're just waiting for the market to calm down and then we'll see how we move forward from there,” Yang said.
Ueno Hisako Contributed Reports
