TOKYO / RankWire.AI / – Japan’s Nikkei 225 experienced a nearly 2% decrease in early trading on Monday, as investor sentiment was affected by growing expectations for increased interest rates. The benchmark declined 1.97% to 65,096.63 before falling further to an intraday low of 64,832.10. During the opening hours, declines were concentrated in technology and other rate-sensitive stocks. The broader Topix also moved downward at first, dropping 0.84% to 4,111.71, but later regained ground within the session.
Most of the Nikkei’s losses were recovered by the end of Monday, closing at 66,311.93, which was down 93.63 points, or 0.14%. This closing figure remained well above the morning’s low and represented the session’s high. The Topix closed at 4,156.29, an increase of 0.23%, reversing its early decline. As trading progressed, market breadth improved with 131 Nikkei components advancing, 91 declining, and three remaining unchanged. The session’s recovery substantially narrowed a morning decline that had briefly exceeded 2%.
Alongside the early downturn in equities, Japanese bond yields increased. The key 10-year government bond yield reached 2.95% on Monday, marking its highest level since 1996. Meanwhile, the two-year yield climbed to 1.73%, the highest since April 1995. Shorter-term yields are closely linked to expectations about future monetary policy changes. Since bond prices move inversely to yields, this rise in yields resulted in a decline in government debt prices. Markets also priced in expectations for higher policy rates in both Japan and the United States.
Bond yields hit levels not seen in three decades
Technology stocks largely contributed to the initial stock market pressure, influenced by the decline in U.S. semiconductor shares at the end of the previous week. The Nikkei’s price-weighted nature amplifies the impact of its largest technology components on daily movements. However, by the end of the session, gains in other sectors helped reduce the Nikkei’s overall decline. Bank equities outperformed many technology stocks as domestic yields rose. The Topix also performed better than the Nikkei during trading hours, leading to a significant difference between Monday’s full-session results and the early steep drop.
Japanese equities faced further downward pressure on Tuesday. The Nikkei fell approximately 1% during the session to 65,646.57, with semiconductor-related stocks among the main decliners. Tokyo markets also experienced another increase in global bond yields and energy prices. Brent crude surpassed $91 a barrel as renewed fighting in the Middle East pushed oil markets higher. The yen traded near 160 per dollar, keeping currency and inflation conditions under focus. Since Japan imports nearly all of its crude oil, energy prices remain a key domestic cost factor.
Interest rate dynamics continue to dominate Japanese markets
The Bank of Japan increased its short-term policy rate to approximately 1% in June and maintained that level in July. The upcoming monetary policy meetings are scheduled for September 17 and 18. The Federal Reserve also emphasized inflation in its latest policy statements, with its chair stating on August 28 that U.S. inflation remained above the central bank’s 2% target. As a result, market expectations for higher interest rates strengthened after these comments, while Japanese government bond yields stayed near levels unseen in about three decades.
Monday’s official close confirmed that the early 1.97% decline in the Nikkei did not carry through the entire session. The index ended just 0.14% lower, with the Topix closing in positive territory. The following day, the market declined again as chip stocks weakened and government bond yields held near multi-decade highs. The two sessions experienced sharp intraday swings across Japanese equities, bonds, and the yen. Interest rates, inflation, currency movements, and energy prices remained crucial factors as Japanese financial markets moved into September.