You may have heard the moans from Tokyo overnight. But here’s what happened in detail:
With the Chinese financial markets closed for the week-long Lunar New Year, Japan decide to show it also had the ability to roil the global markets.
The Japanese stock market tumbled on Tuesday, sparking a global equity selloff, as the yen surged to its highest level against the dollar in more than a year.
The Topix index sank 5.5% on Tuesday, posting its largest decline since August, to 1,304.33. The Nikkei 225 Stock Average tumbled 5.4% to 16,085.44, its biggest drop since June 2013. Meanwhile the yen jumped 1% to 114.75 per dollar, its strongest level since November 2014.
“We had a bubble in people’s expectations of the power of central banks. And now we’re seeing that bubble burst,” Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments in Tokyo told Bloomberg. “Investors are pricing in the fact that central banks can no longer control markets. That became apparent after the Bank of Japan’s last stimulus, and now a similar view is strengthening about the ECB.”
Tuesday’s rout had not specific trigger, but markets have been falling since the beginning of the year as falling oil and commodity prices and have increased fears of a slowing US economy and a drop in global growth.
Japan’s currency strengthened against the dollar despite the Bank of Japan last month introducing negative interest rates on the heels of the US Federal Reserve Bank raising rates in December, and expectations that it will hike rates again this year.
In light of the global economic situation, traders lowered expectations for another rate hike to 30% down from 93% just a few months ago.
Adding to the fears analysts at CreditSights said if Deutsche Bank’s operating results fall short of expectations or litigation costs come in higher than expected, the largest lender in at least four years may have trouble paying the interest on its riskiest bonds. German bank giant said it would be able to pay its debts, but the damage was done. Worried about the declining quality of credit, Japan’s financial sector led the rout, leading all 33 industry groups lower.
Leading the bank sector lower was Mitsubishi UFJ Financial Group, which fell 8.7% to its lowest level in three years, and caused $5.3 billion of the bank’s value to evaporate.
Japan’s benchmark 10-year government bond yields dropped below zero for the first time, underscoring the challenge for banks to make money from lending in the world’s third-largest economy. It fell 7 1/2 basis points to a record minus 0.035%, according to Bloomberg.
Brokerages Nomura Holdings led the losers, plunging 9.1% to its lowest point in three years. Insurer MS&AD Insurance Group Holdings lost 7.2% and Japan Exchange Group, which operates the exchange, sank 5.1%