Chinese Herald News After the central bank of Japan made the decision to raise interest rates for the second time in about 16 years on July 31, the yen rose sharply against the dollar, once rising above 148.50 per dollar, a high for the yen exchange rate in about four months since March. In resonance with the appreciation of the yen, following the overall decline in the Tokyo stock market on August 1, the index plunged sharply in early trading on the 2nd, falling more than 2,000 points intraday.
At its monetary policy meeting on the 31st, the Bank of Japan decided to further raise the policy interest rate used to control prices and the economic situation. The inducement target of the "unsecured overnight call rate", which is the policy rate, has been raised from around 0~0.1% to around 0.25%. The central bank also decided to halve the amount of government bond purchases to about 3 trillion yen (about 144 billion yuan) per month.
Central Bank Governor Kazuo Ueda said at a press conference that afternoon that the goal of achieving 2% price stability was "moving as expected." Rates on home loans and deposits are expected to rise.
This is the second rate hike following the decision to lift negative interest rates in March, and the largest rate hike in about 16 years since December 2008, shortly after the Lehman Brothers crisis. In the foreign exchange market, the yen exchange rate rose, and the dollar fell below 150 against the yen at one point, entering the 149 range. Investors are aware that the interest rate differential between Japan and the United States has narrowed, and the historical depreciation of the yen may change.
Regarding the reasons for the decision to raise interest rates, Ueda also mentioned the risk of rising prices due to the depreciation of the yen. He said that "there will be no significant negative impact on the economic situation", noting that personal consumption is firm. Regarding the possibility of another rate hike this year, Ueda said that it would "depend on the data" and expressed his policy of raising interest rates further if the price trend is in line with expectations.
The increase in the policy rate will lead to an increase in the floating rate of mortgages, and 70% of mortgage signatories choose the variable rate. There will also be an increase in the interest paid by companies when they borrow working capital from financial institutions. On the other hand, the deposit rate will rise and the interest available will increase.
By reducing the amount of government bond purchases, it will turn into a "quantitative tightening" that will reduce the assets held along with the repayment of government bonds. Specifically, the government will reduce the amount of government bond purchases that are currently 6 trillion yen per month in phases to about 3 trillion yen in the first quarter of 2026 (January to March). The balance of government bonds is expected to decrease by 7 to 8% from less than 600 trillion yen currently.
The movement of the Japanese yen and the US dollar is one of the most watched forex pairs so far this year. After a series of record lows in June, this trend suddenly reversed in July, with the yen surging more than 5%. In the Tokyo foreign exchange market on August 1, the yen rose against the dollar, reaching above 148.50 yen per dollar at one point. As of 11 a.m. that day, 1 dollar was worth 149.17 to 149.19 yen, and the yen appreciated by 1.73 from the previous day. On June 28, the yen fluctuated and fell, briefly falling below 161 yen per dollar, hitting a 38-year low since December 1986, when the bubble economy began.
Affected by the higher yen exchange rate in the foreign exchange market, the export sector was under heavy selling pressure, and the Nikkei Stock Average in the Tokyo stock market fell sharply in early trading on August 1. The decline in early trading was more than 1,300 points, falling below 38,000 points. The market generally believes that the export performance of enterprises will deteriorate, and most of the main stocks such as automobiles and electronic appliances have declined. On the 2nd, the Nikkei Stock Average in the Tokyo stock market plunged sharply in early trading, falling more than 2,000 points intraday. U.S. stocks closed lower overnight on concerns about the economic outlook, a momentum that also weighed on Tokyo stocks. The Nikkei Stock Average also fell more than 1,300 points intraday on the 1st, plummeting for two consecutive days.
In early trading on August 2, Asia-Pacific stock markets crashed across the board. The Nikkei 225 index fell rapidly after opening sharply lower, with a maximum decline of nearly 5%; Korea and Australia stock indexes also plunged by more than 2%. Analysts believe that it may be related to the yen carry interest.
Looking at the foreign exchange market, the yen continues to strengthen. It is worth noting that the dollar index has not weakened significantly again. This means that other currencies have not followed the strengthening of the yen.
Historically, the movements of the yen and Japan's interest rates in 2000 and 2007 triggered huge shocks in global capital markets. Behind this may be the reversal of the carry trade, and trigger pressure on the equity market, pressure on commodities, but bullish on gold prices. In a tightening environment, Japanese bond interest rates have risen overall, and the impact on U.S. bond interest rates is complex.
Meanwhile, some of the latest data from the United States has raised fears of a recession and the idea that it may be too late for the Fed to start cutting interest rates. Initial jobless claims posted the biggest increase since August 2023. The ISM manufacturing index, a barometer of manufacturing activity in United States, came in at 46.8%, lower than expected and a sign of economic contraction. After the data, the yield on the 10-year United States Treasury fell below 4% for the first time since February. But in fact, it is not a recession that is scary, but stagflation.
On the morning of the 2nd, the Japan stock market fell crazy. The Nikkei 225 index fell quickly after opening sharply lower, with the largest decline of nearly 5%. Shares of UFJ Financial Group fell by 10%, the biggest drop since March 2020. Japan's Topix Bank Index fell 6.4%. Mitsubishi UFJ Financial and Hitachi fell more than 8%, and Toyota Motor and Mitsui Sumitomo Financial fell more than 4%. Japan's government bonds rose, with the yield on 10-year bonds falling below 1%, suggesting that money is pouring into the bond market for safe-haven.
At the same time, Korea and Australia stock indexes also collapsed across the board, falling by more than 2%. Korea's Kospi fell 2.6% at one point, its biggest drop since April 19. Korea's Kospi index fell nearly 1% this week and is poised to move lower for the fourth straight week. The top 10 stocks in Korea's Kospi Index were lower across the board, and all industry indices were lower across the board. SK hynix fell more than 5%, Samsung Electronics, LG Energy Solution, Hyundai Motor, and Kia Motors fell more than 2%.
Market analysts said: "With the Bank of Japan raising interest rates further, stock prices in sectors such as real estate and construction have also declined significantly. Due to the rapid appreciation of the yen, people suddenly became cautious about the future performance of export-related companies, which caused stock prices to fall sharply. ”