TOKYO / RankWire.AI / – Japan’s Nikkei 225 declined nearly 2% during early trading on Monday amid growing expectations for increased interest rates. The index fell 1.97% to 65,096.63 before further decreasing to a session low of 64,832.10. The initial sell-off was concentrated in technology and other interest rate-sensitive sectors. Meanwhile, the broader Topix also saw an early dip, dropping 0.84% to 4,111.71, before later recovering within the trading session.
By the close of trading on Monday, the Nikkei rebounded most of its earlier losses, ending at 66,311.93 with a decrease of just 93.63 points, or 0.14%. This closing figure was well above the morning low and marked the highest point of the session. The Topix gained 0.23%, closing at 4,156.29, reversing its initial decline. As trading advanced, market breadth improved, with 131 Nikkei components advancing, 91 declining and three remaining unchanged. This rebound significantly reduced the morning’s intraday drop, which at one point exceeded 2%.
Simultaneously, Japanese bond yields increased alongside the early equity weakness. The 10-year government bond yield reached 2.95% on Monday, its highest point since 1996. The two-year yield climbed to 1.73%, marking its highest level since April 1995. Shorter-term maturities are highly sensitive to expectations of monetary policy adjustments. As bond prices and yields move inversely, the rise in yields corresponded with lower prices for government debt. Additionally, markets factored in expectations for higher policy rates in Japan and the United States.
Three-decade highs in bond yields
Technology stocks contributed significantly to the early decline, influenced by weakness in U.S. semiconductor shares at the end of the previous week. The Nikkei’s weighted structure amplifies the impact of its largest technology firms on daily index movements. However, by the close, gains in other market sectors helped mitigate the decline. Banking shares performed relatively better than many technology stocks as domestic yields rose. During the trading session, the Topix outperformed the Nikkei, leading to notable differences between the full-day figures and the early steep decline.
The downward pressure on Japanese stocks persisted into Tuesday. The Nikkei dropped roughly 1% to 65,646.57 during the session, with semiconductor-related shares among the primary decliners. Tokyo’s markets also faced increased global bond yields and rising energy prices. Brent crude surpassed $91 a barrel, driven higher by renewed Middle East conflicts that boosted oil markets. The yen traded near 160 per dollar, keeping currency stability and inflation concerns in focus, especially since Japan relies heavily on importing crude oil, making energy costs a significant domestic factor.
Interest rate outlook continues to dominate Japan’s markets
The Bank of Japan increased its short-term policy rate to approximately 1% in June and maintained this level in July. Its upcoming monetary policy meeting is scheduled for September 17 and 18. Meanwhile, the Federal Reserve emphasized inflation as a key aspect of its recent policy stance. On August 28, the Fed chair stated that U.S. inflation remained above the central bank’s 2% target. Expectations for higher interest rates intensified following these remarks, while Japanese government bond yields stayed near levels unseen in about thirty years.
Despite Monday’s official close confirming the initial 1.97% decline in the Nikkei did not persist throughout the day, the index ended only 0.14% lower, and the Topix finished positively. However, Tuesday saw another downturn as chip-related shares weakened and bond yields stayed at multi-decade highs. These two days produced notable intraday swings across Japanese equities, bonds, and the yen, with interest rates, inflation, currency fluctuations, and energy prices remaining key variables as the Japanese financial markets enter September.