August 6, 2024 - 7:00am
It is, to use Trumpian language, a bloodbath. The Tokyo stock market has plunged 12.4%, compounding the misery of last Friday when Tokyo’s financial markets suffered a dramatic plunge of over 2000 points (the second biggest drop in history) in the Nikkei. Some emblematic companies had an especially painful day then — Tokyo Electron lost 11.98%, Isetan Mitsukoshi (Japan’s biggest department store chain) fell 10%, real estate giant Mitsui Fudosan lost 8%, as did Softbank, and Toyota was down 4%. But those hoping last week was just a blip have been dismayed to see the rout has only continued.
The Nikkei is now down nearly 4% from a year ago. In contrast, thanks to the see-saw effect that sees the Japanese currency rise while everything else falls, the Yen gained considerably against the dollar moving from 162 to 142. After a long period of virtual stasis in Japanese finance, many here are in a state of shock.
There are many variables at work, but events in the US were the main factor behind the sudden shifts of the financial tectonic plates. Poor economic data suggesting a faster than expected slowdown raised concerns over a possible US recession, with tech stocks taking a battering. This, plus the prospect of a rate cut signalled by the Federal Reserve for later this year, seems to have triggered the initial tremors in Japan.
As for the seemingly moribund Yen, the currency was suddenly jolted back into life after a long slow decline. This was primarily due to substantial interventions by the Japanese authorities, for whom the continual erosion of the Yen was becoming an embarrassment, coupled with the rate hike by the Bank of Japan last week. These factors, in addition to potential further cuts, kick-started the revival.
The stronger Yen is certainly worrying for corporate exporters, who had grown used to the weak currency profits. But it’s not all bad news. The stronger currency is good for expat savers and Japanese tourists heading overseas. Another potential up-side, at least for those who don’t directly benefit, would be a potential drop-off in the number of tourists to Japan. There have been serious issues regarding excessive tourism and much debate as to whether visitor numbers should be restricted, or a dual pricing system introduced to cope with the hordes of “gaijin” blundering around the temples and shrines and forcing out the locals. The end of Japan’s brief tenure as the world’s unlikeliest budget travel destination would be met with a collective sigh of relief by some.
What happens next is hard to say. Could stocks continue to plunge and could the Yen go even higher? The ongoing events underscore how finely attuned the Japanese currency still is to the vicissitudes of the American economy and geopolitics. A serious financial shock to the US economy, which will inevitably metastasise worldwide, could potentially see the sort of dramatic gains that occurred in the wake of the 2008 global financial crash, where about the only good place to be financially speaking was Japan.
But the implications are surely broader. Tokyo’s woes underscore how interconnected and fragile the global economy now is. If merely worrying, rather than disastrous, economic news from the US can spark a conflagration in Japan, what will happen to global markets, currencies, and even the western security alliance, if something truly calamitous transpires — such as a dollar collapse? Japan, as so often, could be offering us a preview movie of events to come.
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