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Text: Xie Jiu
On August 5, Japan's stock market plunged 12.4%, and the Nikkei erased 4,451 points, the largest one-day drop in Japan's stock market. If calculated since July 12, the Japan stock market has fallen by 26% in just a dozen trading days.
The Japan stock market plunge also brought global markets to collapse, with Korea and Taiwan plummeting about 9% on the day, and major United States stock indexes also plunging about 3%. So, what exactly happened in Japan that made Japan and the surrounding stock markets bleed?
On August 5, 2024 local time, the electronic board showed that Japan's Nikkei 225 index plummeted by more than 4,400 points, exceeding the decline in the 1987 Black Monday trading day. (Photo courtesy of Visual China)
To understand the Japan stock market tragedy, we must first understand the yen carry trade.
For a long time, the yen interest rate has been very low, in the zero interest rate or even negative interest rate range, the yen's long-term stable low interest rate has given rise to a huge yen arbitrage trading market in the global market, global investors can borrow yen at a very low price, and then exchange for other high-interest currencies, such as the US dollar, from which to earn "risk-free" interest rate spread income.
Of course, this kind of arbitrage is not truly risk-free, and when the interest rate differential between the yen and the dollar changes, the risk-free arbitrage of the yen, which has been popular for many years, will turn into a financial tsunami. The Bank of Japan's sudden interest rate hike this year has instigated the butterfly wings that triggered this financial storm.
In recent years, Japan's price index has continued to rise, unexpectedly escaping 30 years of deflation. In March, the Bank of Japan raised interest rates for the first time in 17 years, ending negative interest rates. According to common sense, Japan's interest rate hike should make the yen begin to appreciate, but the yen rate hike coincided with the repeated postponement of the United States interest rate cut schedule, and under the pressure of the dollar's appreciation, the yen did not rise but depreciated, hitting a 40-year low in early July this year.
The yen's story doesn't end there. On July 31, Japan implemented its second rate hike. At the same time, inflation in the United States has finally cooled, and the market widely expects that the Fed will cut interest rates in September this year. Therefore, this time Japan raised interest rates, just in time for the dollar interest rate cut, and a financial storm detonated.
As the yen enters a cycle of interest rate hikes and the dollar enters a cycle of interest rate cuts, this means that the interest rate differential between the yen and the dollar will become smaller and smaller, and the biggest impact is to break the previous "risk-free" arbitrage model of the yen, and those investors who used to borrow yen on a large scale to buy dollars will now have to hurry back the yen.
For international investors, how can they repay the yen? The most straightforward way is to buy yen in the foreign exchange market and pay it back.
When a large number of investors start buying the yen, the yen begins to rise rapidly. For the yen, which was supposed to rise when the Bank of Japan raised interest rates in March, was weighed down by the then strong dollar, this time, as global investors began to buy the yen, the yen ushered in a retaliatory rally, and within a month, the yen soared 12% against the dollar.
For those investors who arbitrage between the yen and the dollar, such a huge increase in the exchange rate has forced many to consider other ways to repay the yen, and those who hold Japan stocks have begun to sell Japan stocks, which has led to a sharp decline in the Japan stock market.
Stills from "Naoki Hanzawa".
If only the collapse of the traditional arbitrage model of the yen, it will not make the Japan stock market plummet to such a miserable state, and to add insult to injury, in recent years, the pattern of international investors' arbitrage of the yen has been further upgraded, and many investors are no longer satisfied with the small arbitrage of borrowing yen to buy dollars, but borrowing yen to buy Japanese stocks, which has further aggravated the violent shock of the Japan stock market, especially led by Buffett.
As early as 2020, during the epidemic, Buffett began to test the waters of the Japan stock market, buying high-dividend stocks such as Itochu Corporation, Marubeni Corporation, Mitsubishi Corporation, Mitsui Corporation and Sumitomo Corporation. In 2023, Buffett came to Japan specifically for inspection, and then continued to increase his investment in the Japan stock market, increasing his holdings in the shares of Japan's five major trading companies to about 9%.
It was under Warren Buffett's leadership that global investors began to enter the Japan stock market in a big way. In 2023, overseas investors bought more than 3 trillion yen in the Japan stock market, and driven by overseas investors, the Japan stock market began to rise rapidly, and in 2023, the Nikkei 225 index rose by as much as 28%, the second highest increase in the world. By the beginning of March 2024, the Nikkei 225 index broke through the 40,000-point mark, breaking through the bubble highs of the 90s in one fell swoop.
The Nikkei 225 index broke through 40,000 points
For Japan, this scene is almost unbelievable. Because Japan's stock market bubble has been falling for 30 years after bursting in the 90s, many Japanese believe that Japan's stock market will never return to its highs. As a result, driven by international investors, the Japan stock market miraculously surpassed the highs of the 90s.
Of course, international investors who push up Japan's stock market are not living Lei Feng, and many can be regarded as empty gloves white wolves, making the most of the low-cost yen and borrowing yen to buy Japan stocks. For example, Warren Buffett bought the shares of Japan's five major trading companies, with an investment cost of 1.6 trillion yen, all through the issuance of low-interest yen bonds to obtain funds to invest in the Japan stock market.
Inspired by Warren Buffett, in recent years, more and more international investors have borrowed low-cost yen to buy Japan stocks, which has rapidly pushed up the Japan stock market, and since 2022, the Nikkei 225 index has risen from more than 24,000 points all the way to more than 42,000 points this year, an increase of nearly 80%. Against the backdrop of Japan's economic recovery, the Japan stock market took the lead in breaking through the all-time high, largely driven by international investors.
Stills from "Flowers".
For the Japan stock market, it can be said that it is also an international investor, and it is also an international investor. When the historic moment of the yen rate hike and the dollar rate cut arrived, a large number of international investors had to quickly sell Japan stocks to repay the yen, and since many international investors had already made a lot of profits, the sell-off was not soft.
A large number of international investors sold off, triggering a stampede in the Japan stock market, and under the rapid plunge, many leveraged investors' positions were liquidated and forced to sell, which in turn triggered a further decline in the market, and the historic tragedy of the Japan stock market was born.
For many international investors, there is still room to make a profit even if they sell now, as they have made a lot of money in the Japan stock market in recent years. After the bursting of the stock market bubble in the Japan 90s of the last century, many ordinary Japan people have been away from the stock market, after this round of Japan stock market was speculated by international investors, many Japan people began to re-enter the Japan stock market, and the result was a blow again, plummeting nearly 3 percent in more than a dozen trading days, which was more tragic than the stock market crash in the 90s of the last century.Japan
On the morning of August 6, although the Japan stock market rebounded sharply by 9%, it was still in repeated shocks, indicating that the crisis is not over.
(Excerpted from WeChat public account Sanlian Life Weekly)