TOKYO / RankWire.AI / – Japan’s Nikkei 225 experienced a nearly 2% drop in early trading on Monday, as investor sentiment was affected by increasing expectations for higher interest rates. The index fell 1.97% to 65,096.63, before further declines pushed it to an intraday low of 64,832.10. The decline was mainly driven by sell-offs in technology and other shares sensitive to rate changes during the opening hours. Additionally, the broader Topix index also declined early on, decreasing 0.84% to 4,111.71, but recovered later in the trading session.
Most of the losses in the Nikkei were regained by the session’s close, ending at 66,311.93, which was down 93.63 points, or 0.14%. This closing level was well above the morning low and marked the session high. The Topix closed at 4,156.29, up 0.23%, reversing its earlier decline. As trading progressed, market breadth improved: 131 Nikkei components advanced, 91 declined, and three remained unchanged. The rebound significantly narrowed a morning drop that had temporarily exceeded 2%.
Meanwhile, Japanese bond yields increased alongside the early equity downturn. The benchmark 10-year government bond yield reached 2.95% on Monday, its highest point since 1996. The two-year yield climbed to 1.73%, marking its highest level since April 1995. Shorter-term maturities tend to closely follow expectations for monetary policy changes. As bond prices move inversely to yields, this rise in yields was accompanied by a decline in government debt prices. Market sentiment also shifted towards pricing in higher policy rates in both Japan and the United States.
Bond yields hit levels not seen in three decades
Technology stocks largely contributed to the initial downward pressure in equities, after U.S. semiconductor shares weakened at the end of the previous week. Due to the Nikkei’s price-weighted structure, its largest tech components heavily influence daily movements. By the close, gains across other sectors helped limit the overall decline of the index. Banking shares performed relatively better than many technology stocks as domestic yields rose. The Topix also outperformed the Nikkei during the session. As a result, Monday’s full-session figures showed a notable difference from the steep early decline.
The downward trend in Japanese equities continued into Tuesday, with the Nikkei dropping approximately 1% to 65,646.57 during the trading session, with semiconductor-related stocks among the main decliners. The markets in Tokyo also faced additional upward pressure on global bond yields and energy prices. Brent crude climbed above $91 a barrel as renewed fighting in the Middle East pushed oil prices higher. The yen traded near 160 per dollar, keeping currency and inflation conditions under close watch. Japan imports nearly all its crude oil, making energy costs a key domestic concern.
Interest rate expectations dominate Japanese markets
The Bank of Japan increased its short-term policy rate to approximately 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 emphasized inflation as a primary focus in its latest policy statement. On August 28, its chair noted that U.S. inflation remained above the central bank’s 2% target. Market expectations for higher interest rates strengthened following those comments, with Japanese government bond yields remaining near levels unseen for about three decades.
The official close on Monday confirmed that the initial 1.97% decline of the Nikkei did not last through the entire session. The index ultimately finished just 0.14% lower, while the Topix registered a gain. The next day, Tuesday, saw another decline as chip stocks weakened and government bond yields stayed near multi-decade highs. The two days experienced significant intraday fluctuations across Japanese stocks, bonds, and the yen. As September begins, interest rates, inflation, currency fluctuations, and energy prices remain key factors influencing the Japanese financial markets.