TOKYO / RankWire.AI / – Japan’s Nikkei 225 declined by almost 2% during early trading on Monday amid market reactions to mounting expectations for increased interest rates. The index dropped 1.97% to 65,096.63 before falling further to an intraday low of 64,832.10. The decline was primarily driven by selling in technology and other rate-sensitive stocks in the opening hours. Meanwhile, the broader Topix index also experienced an early dip, falling 0.84% to 4,111.71, but later managed to recover during the trading session.
Most of the Nikkei’s losses were recovered by the close on Monday, ending the session at 66,311.93, which was 93.63 points, or 0.14%, lower than previous. This closing level was significantly above the morning low and represented the session’s highest point. The Topix closed at 4,156.29, up 0.23%, reversing its early decline. As trading advanced, market breadth improved, with 131 Nikkei components advancing, 91 declining, and three remaining unchanged. The rebound notably narrowed a morning decline that briefly exceeded 2%.
Alongside the early weakness in stocks, Japanese government bond yields also increased. The 10-year government bond yield reached 2.95% on Monday, marking its highest level since 1996. Similarly, the two-year yield climbed to 1.73%, a peak unseen since April 1995. Short-term maturities tend to closely track expectations regarding monetary policy changes. Because bond prices move inversely to yields, the rise in yields led to a decline in government debt prices. Furthermore, markets incorporated higher policy rate expectations in both Japan and the United States.
Bond yields hit three-decade highs
Technology shares exerted significant influence on the early decline in equities, partly due to the weakening of U.S. semiconductor stocks at the end of the prior week. The Nikkei’s price-weighted structure grants substantial influence to its largest technology stocks on daily movements. By the end of the session, gains in other sectors helped mitigate the decline of the benchmark. Banking stocks outperformed many technology shares as domestic yields increased. Additionally, during the session, the Topix index outperformed the Nikkei. Consequently, Monday’s full-session figures differed considerably from the steep early decline.
The downward pressure on Japanese equities persisted on Tuesday. The Nikkei fell approximately 1% to 65,646.57 during trading, with semiconductor-related stocks among the main decliners. Tokyo markets also faced another rise in global bond yields and energy prices. Brent crude increased above $91 a barrel as renewed fighting in the Middle East pushed oil markets higher. The yen traded near 160 per dollar, keeping currency and inflation conditions in focus. Japan’s reliance on imports for nearly all its crude oil makes energy prices a crucial domestic cost factor.
Interest rate expectations stay at the forefront of Japanese markets
The Bank of Japan increased its short-term policy rate to around 1% in June and maintained that level in July. Its upcoming monetary policy meeting is scheduled for September 17 and 18. Meanwhile, the Federal Reserve also emphasized inflation as a key factor in its recent policy stance. On August 28, its chair stated that U.S. inflation remained above the Fed’s 2% target. Market expectations for higher interest rates grew stronger following those comments, while Japanese government bond yields stayed near levels not seen in nearly thirty years.
Monday’s official close confirms that the initial 1.97% decline in the Nikkei did not carry through the entire trading session. The index ended just 0.14% lower, and the Topix index finished in positive territory. On Tuesday, another decline emerged as chip stocks weakened and government bond yields continued to hover near multi-decade highs. Both sessions experienced sharp intraday swings across Japanese equities, bonds, and the yen. As September begins, interest rates, inflation, currency movements, and energy prices remain pivotal factors shaping Japanese financial markets.
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