The Tokyo Stock Exchange, the world’s fifth-largest, posted a drop of more than 12 percent on Monday. Since its peak in July, the Japanese stock market has lost 20 percent of its value.
Investors are selling stocks in large numbers. Trading was temporarily suspended in both Japan and South Korea on Monday to limit the damage.
Panic selling
The cause of the panic selling is the rapid rise in the value of the yen. After years of almost “free money”, the Japanese central bank raised interest rates last week. This caused the exchange rate of the Japanese currency to rise against the dollar. This weakens the competitive position of an often export-oriented industry, resulting in disappointing results on the stock market.
In addition, the rise of the yen causes a reversal of the so-called carry trade“International investors borrow in yen at a low interest rate and invest that money elsewhere in the hope of earning a higher return,” explains Luc Aben, chief economist at Van Lanschot Kempen. “As the yen rises, investors unload their purchases to repay their Japanese loans. The impact of this is global.”
Western stock markets are also in negative territory. The AEX in Amsterdam already fell sharply last week and opened with a loss of 3 percent on Monday. One of the main reasons for the change in sentiment is the outlook for the US economy. Disappointing US employment figures were published on Friday.
Overreaction
An overreaction, Aben believes. “The US economy has been heavily stimulated in recent years by consumers, who in turn have received massive support from the government. At some point it ran out of steam. The fact that unemployment is rising is not because there are massive layoffs, but mainly because the US labor supply is growing. In short, this is not the alarm signal that the markets make it out to be.”
In addition to traditional financial markets, cryptocurrencies are also in dire straits. The value of Bitcoin fell by 15 percent, that of Ether by 20 percent.
Read also: Japan’s central bank raises interest rates for the first time since 2007
The Bank of Japan has it prime interest rate in the country for the first time since 2007. The central bank thus ended a decades-long period in which Japan sought to boost inflation with low interest rates and bond purchases.