Japanese stock performance took a turn for the worst in recent times. The Nikkei fell around 11% this week, its biggest one-week fall since the heat of the global financial crisis in 2008. Does this signal the beginning of something drastic for the Japanese economy, or is it an expected development due to recent news?
We are leaning towards the second version. The Bank of Japan surprised everyone with their rate cut announcement starting with February the 13th and sent their national currency on an upwards spiral. The USD/JPY parity is also trading at multi-year lows, hitting the 111.00 line for the first time since the autumn of 2014. A strong Yen, as shown so many times in the past, is not good news for the Japanese economy.
Image Source: businessinsider.com
As we all know, their economy is very much dependent on exports. Great Japanese manufacturers such as Suzuki, Honda or Sony all export state-of-the-art technology overseas, providing great added value for the Japanese economy. A stronger Yen leads to harder exports. Combine this with a lower-than-expected industrial production in January and a decline in household spending, and you have all the necessary ingredients for a short-term crisis in Japanese stocks.
Due to the strength of the Yen, dips in oil prices and unsure futures of traditional Japanese companies, investors are now searching for safe-haven investment vehicles like government bonds or gold. Government officials said they will carefully monitor market developments, hinting towards another BoJ intervention in the market if stock prices will collapse much harder.
Japan is the most recent name on the list of stock market underperformers in 2016, after China and the EU. Commodity currencies and emerging markets are also taking hits in the first quarter of 2016, and we just have to see which will be first to exit the downtrend. Or will they exit all at the same time, provoked by U.S. dollar weakness for the first time in years? We have to wait and see.
Find out more about what is happening in the world of Asia Business and financial markets through the Nikkei website.
