TOKYO / RankWire.AI / – Japan’s Nikkei 225 experienced nearly a 2% decrease during early trading on Monday as investor sentiment was affected by mounting expectations for higher interest rates. The index declined 1.97%, reaching 65,096.63 before falling further to an intraday low of 64,832.10. The initial sell-off was predominantly concentrated on technology and other rate-sensitive stocks during the market opening. Meanwhile, the broader Topix index also started the session with a decline, dropping 0.84% to 4,111.71, though it later recovered some of its losses within the trading day.
By the session’s close, the Nikkei managed to recover the majority of its earlier decline, closing at 66,311.93, which was 93.63 points lower, or 0.14%, from the previous day. This closing figure remained well above the morning’s lowest point and marked the highest level of the day. The Topix index also finished higher at 4,156.29, up 0.23%, reversing its earlier downward trend. As trading advanced, market breadth improved with 131 Nikkei components advancing, 91 declining, and three remaining unchanged, which significantly narrowed the session’s initial decline that had briefly exceeded 2%.
Simultaneously, yields on Japanese government bonds increased in tandem with the early downturn in equities. The yield on the benchmark 10-year government bond rose to 2.95% on Monday, reaching its highest point since 1996, while the two-year yield increased to 1.73%, its highest since April 1995. Shorter-term maturities tend to closely follow expectations for changes in monetary policy, and as bond prices move inversely to yields, the rise in yields reflected a decline in bond prices. Additionally, markets adjusted their expectations for higher policy rates in both Japan and the United States, contributing to the rise in yields.
Bond yields hit levels not seen in three decades
Technology stocks primarily drove the early downward momentum in equities after U.S. semiconductor shares weakened at the end of the previous week. Given the Nikkei’s price-weighted structure, its largest technology components exert considerable influence over daily movements. However, by the close, gains in other market sectors helped mitigate the initial sharp decline. Bank shares outperformed many technology stocks as domestic yields increased, and the Topix index also fared better than the Nikkei during the session. Consequently, the full-session figures on Monday showed a significant difference from the steep early decline, with the market recovering to some extent by the end of the day.
On Tuesday, the downward trend in Japanese equities persisted, with the Nikkei falling approximately 1% to 65,646.57 during the trading day, as semiconductor-related shares led the declines. The markets in Tokyo also faced additional upward pressure from rising global bond yields and energy prices. Brent crude surpassed $91 per barrel as renewed fighting in the Middle East boosted oil prices. Meanwhile, the yen traded near 160 per dollar, keeping currency fluctuations and inflation trends closely in focus, especially given Japan’s reliance on importing almost all of its crude oil, making energy costs a significant domestic economic factor.
Interest rate policies stay at the core of Japanese market movements
In June, the Bank of Japan increased its short-term policy rate to approximately 1% and maintained that level through July, with its upcoming monetary policy meeting scheduled for September 17 and 18. Meanwhile, the Federal Reserve continued to emphasize inflation as a key consideration in its latest policy stance, 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 further after those comments, yet Japanese government bond yields remained near levels not seen for about thirty years. Monday’s official closing figures confirmed that the initial 1.97% decline in the Nikkei did not persist through the entire trading session, with the index ending only 0.14% lower, and the Topix finishing in positive territory. However, Tuesday’s trading saw another decline amid weakening chip shares and bond yields staying close to multi-decade highs. These two days of trading created significant intraday volatility across Japanese stocks, bonds, and the yen, with interest rates, inflation, currency movements, and energy prices continuing to be key variables shaping the markets as Japan moves into September.