Investment trust insider on Japan’s sell-off – James Carthew: Surveying the damage from Japan’s savage selloff
How does the land lie after Japan’s worst stock market crash since 1987 and as the US approaches its first rate cut, could the tide be set to turn for growth and small caps?
Markets have been behaving oddly over the past few weeks, with violent swings in stock prices and currencies. As usual, a confluence of factors is likely to be responsible, but chief among them may have been the Bank of Japan’s 31 July decision to increase its target interest rate to around 0.25% from between 0% and 0.1%.
That such a tiny move could have such large repercussions might seem odd, but because interest rates in Japan were so low, vast sums have been borrowed in Japanese yen to fund all sorts of investments.
The decision had been rumoured well in advance but in early July markets were still expecting that rates would not hit 0.25% until next year. The realisation that the rate hike might be coming earlier triggered a swift unwinding on many of the trades that had been financed with cheap yen.
The currency soared as investors rushed to buy yen to repay their debt. On 3 July the US dollar/Japanese yen exchange rate was 161.63; by 6 August it was 144.68. A stronger yen should dampen inflation in the country as the cost of imported goods and services falls. In June this was running at 2.8% and wage increases were higher than that. Bringing inflation under control was part of the motivation for the rate rise.
The sharp rise in the yen was accompanied by even more savage falls in Japanese stock prices. The MSCI Japan index had hit a new all-time high on 11 July, but fell by more than 25% between then and 5 August, wiping out all the gains that it had made over 2024. It has rebounded by more than… read more here