What caused the sudden plunge in the Japanese stock market on Monday?

On June 17, the Japanese stock market experienced a wave of selling, with the Nikkei 225 index falling more than 800 points at one point during the day, a drop of over 2%, breaking through the psychological barrier of 38,000 points. By the close of trading, the Nikkei 225 index had fallen by 712 points, still a decline of 1.83%.

Against the backdrop of generally small declines in surrounding markets, why did the Japanese stock market plummet? Just now, in response to the capital market, Japanese Prime Minister Fumio Kishida also made a new statement.

Sharp Decline in the Japanese Stock Market

Today, the Japanese stock market opened low and continued to decline. In the afternoon, the Nikkei 225 index fell by over 2%, hitting a low of 37,950.20 points. By the end of the day, the Nikkei 225 index had dropped by 712.12 points to 38,102.44 points, a decrease of 1.83%; the TOPIX index in Japan fell by 46.60 points to 2,700.01 points, a decline of 1.70%.

From a sector perspective, almost all 33 industry sectors on the Tokyo Stock Exchange experienced declines, with real estate, automotive, petroleum and coal products, and mining sectors leading the losses. The real estate sector saw a decline of 3.5%. Additionally, Japanese automotive stocks collectively fell, with Suzuki Motor closing down by 3.64%, Mazda down by 3.68%, and Toyota down by 2.57%.

On the news front, Japanese automakers were exposed in a collective falsification scandal. The Japanese Ministry of Land, Infrastructure, Transport and Tourism recently reported that Toyota, Mazda, Yamaha engines, Honda, and Suzuki, five Japanese automakers, engaged in fraudulent activities such as falsifying collision data in production certification applications, engine power test fraud, and falsifying brake test results. Currently, the 32 models of these 5 automakers involved in fraud have been discontinued, and both the automakers and related companies will face significant economic losses.

In terms of individual stocks, on June 17, Sony and Hitachi fell by nearly 3%, while Tokyo Electronics, Xunxiao, Itochu Corporation, and others all fell by over 2%. Chip-related stocks also declined, with Tokyo Electronics falling by 2.5% and Advantest falling by 3.7% Between the end of October last year and mid-March this year, the Nikkei 225 index rose by more than 33%, hitting a historical high of 41087.75 points on March 22 last year, only to fall back to 36733.06 points a month later. Since late April, the Nikkei 225 index has mostly fluctuated around 38500 points, with fluctuations of about 500 points. Kazuo Kamitani, a stock strategist at Nomura Securities, stated that the Nikkei index has been sideways for a long time and is now being influenced by some concerns about the economy.

Analysts also pointed out that the main reasons for the decline in the Japanese stock market on June 17 are twofold:

Firstly, it was dragged down by the sharp decline in European stock markets. The unstable European political situation has become a reason for investors to strengthen their risk aversion. Last Friday, major stock indices in Europe all fell by more than 2%, with the Italian stock market dropping by nearly 3% and the French stock market falling by 2.66%. This has led to an increase in risk aversion sentiment in the capital markets. Since the end of October last year, the Japanese stock market has seen significant gains, accumulating many profits. These funds have chosen to sell off for safety.

Secondly, the Bank of Japan announced last Friday that it would reduce its purchases of government bonds, bringing uncertainty to monetary policy and putting selling pressure on investors. Last Friday, the Bank of Japan announced that it would maintain its benchmark interest rate at around 0-0.1%, but indicated that it would gradually reduce the scale of bond purchases, steadily exiting its large-scale monetary stimulus policy.

After the Bank of Japan's decision to reduce bond purchases, the yen weakened instead. Analysts Hu Shaohua and Liu Sijia from Donghai Securities pointed out that the market had already anticipated the Bank of Japan's reduction in bond purchases. After the decision was made, due to the high uncertainty and the timeliness not meeting market expectations, the yen quickly depreciated. Subsequently, Bank of Japan Governor Haruhiko Kuroda made a hawkish statement at a press conference, expressing confidence in Japan's inflation outlook and indicating that the scale of bond purchases would be significantly reduced, with the possibility of a rate hike in July.

The yen then appreciated, but ultimately failed to return to its position before the meeting, as the market still lacks confidence in the normalization of the Bank of Japan's monetary policy. According to overnight index swap market implied pricing observations, the market currently prices in only one 10 basis point rate hike by the Bank of Japan in October 2024, with a probability of a rate hike in July at only 46%.

Donghai Securities stated that the Bank of Japan is currently only exiting its existing loose policy tools and has not yet begun to tighten, but there are many concerns. After reducing bond purchases, the Bank of Japan's next steps will be rate hikes and balance sheet reduction, both of which still face significant resistance and may not start quickly.

Statement from the Japanese Prime Minister

On June 17, Japanese Prime Minister Fumio Kishida stated that the government and the Bank of Japan believe that consumption lacks momentum and wage growth has not kept pace with inflation.

Kishida also stated that issues related to ETF holdings must be handled by the Bank of Japan, and the government has no intention of requiring the Government Pension Investment Fund of Japan to purchase ETFs from the Bank of Japan.

In March this year, there were reports that Bank of Japan officials were considering ending ETF purchases, provided that the central bank's inflation target is likely to be achieved. Insiders said that Bank of Japan officials believe that with the recent repeated highs in Japanese stocks, there is no need to continue buying ETFs to limit risk premiums Insiders added that while the Bank of Japan may abandon its support for the stock market, it may still continue to focus on maintaining stability in the bond market and intervene when yields rise significantly.

In addition, data released last Wednesday showed that in May, Japan's domestic corporate goods price index saw a year-on-year growth rate reaching a 9-month high, indicating that the depreciation of the yen has pushed up the cost of imported raw materials, thereby exerting upward pressure on prices. Analysts suggest that this cost-driven inflation may dampen consumption, weakening the possibility of the Bank of Japan achieving demand-driven inflation before further reducing stimulus measures.

At its policy meeting in March, the Bank of Japan announced a 10 basis point rate hike, raising the key interest rate to around 0-0.1%, marking Japan's first rate hike since 2007 and signaling the end of the 8-year era of negative interest rates.

Many market participants expect the Bank of Japan to hike rates again at some point this year. The latest Reuters survey shows that the money market expects the Bank of Japan to raise rates by around 16 basis points in October and by nearly 22 basis points at the meeting on December 19.

As the Bank of Japan moves towards monetary policy normalization, some Japanese politicians and market participants have proposed ideas on how to sell off their massive holdings of ETFs or use the proceeds for spending.

However, the Bank of Japan has not yet formulated a plan to sell off its large holdings of ETFs and government bonds, partly due to concerns about financial market instability