Monetary Policy Gap between Japan and U.S. Causes Slump in Stock Market

Nikkei 225 index marked historical decline by 2,216 yen on Friday August 2. It was the second largest drop since Monday October 20, 1987, as known as the Black Monday. While it was reported that most elements came from the United States, including negative information about U.S. economy, the fact that monetary policies of Japan and U.S. are going opposite directions may have caused concern on the future of Japanese economy. 

Nikkei 225 ended trade on Friday at 35,909 yen, marking 5.8% of down from the previous day. Compared with the greatest decline of 14.9% on the Black Monday, the ratio cannot be said as dramatic as 37 years ago. However, the significant volatility in the stock market indicated the magnitude of psychological shock of the investors on tidal shift of monetary policy trend.

 

The Chair of FRB, Jerome Powell, indicated possibility of cutting its policy interest rate in September, after the decision of maintaining the rate in the Federal Open Market Committee on July 31. The comment of Powell worked for expanding concerns on U.S. economy, rather than expectation of policy change.

 

Some indexes reinforce the concern. The Institute for Supply Management said the purchasing managers’ index (PMI) of manufacturing dropped from 48.5 in June to 46.8 in July, marking the greatest drop since last November. The number of applications for unemployment benefits increased to the level of last August. U.S. stock market showed significant decline on Thursday.

 

However, simultaneous moves of monetary authorities in Japan and U.S. may have caused excitement of stock markets. The Bank of Japan decided to raise its policy rate from 0-0.1 to 0.25 on Wednesday. The governor indicated further hike within this year. A half day later in Washington, FED anticipated interest cut in the next meeting. The difference of direction between Japan and U.S. was highlighted immediately.

 

Right after the decision of JOB, Japanese yen steeply appreciated against U.S. dollar, causing concern on the future of exporting business such as car manufacturing. Stock market declined by over 1,300 yen on Thursday, and it further dropped on Friday.

 

Cheap yen meant cheap stocks in Japan for the investors, leading to active purchases in stock market in Japan. It has been indicated that yen carry trade, which purchases risk assets by cheap yen, was expanding. That kind of activity based on cheap yen can backlash with the appreciation of Japanese yen.

 

Toyota Motors announced that its operating income marked record high of 1.3 trillion yen in the second quarter of 2024. The main reason was increased sales based on cheap yen. It is estimated that a rise of one yen against dollar will cause losing 50 billion yen of annual profit in Toyota. Cheap yen can reduce cost for procurement of raw materials. Each company will be tested its capacity of management.

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