Bank of Japan's hawkish stance + worsening concerns of economic recession lead to consecutive second day of sharp decline in Japanese stocks

According to the Zhitong Finance APP, due to market expectations that the Bank of Japan will further tighten monetary policy, the Japanese stock market plummeted for the second consecutive day. As of the time of publication, both the TOPIX index and the Nikkei 225 index fell by over 4%, with these two benchmark stock indices closing down by 3.24% and 2.49% respectively on Thursday. At the same time, the exchange rate of the Japanese yen against the US dollar rose to 149.55 yen per US dollar, nearing its highest level since March, putting pressure on Japan's export-oriented economy.

The Bank of Japan unexpectedly raised interest rates on Wednesday and announced detailed plans to reduce its large-scale bond purchase program, indicating the central bank's intention to continue normalizing monetary policy. The Bank of Japan raised the policy rate by 15 basis points to 0.15%-0.25%, contrary to market expectations of no change. The central bank also announced that by the first quarter of 2026, it will reduce monthly bond purchases to 30 trillion yen, with a quarterly reduction of around 400 billion yen, a slightly more aggressive approach than the market generally expected of halving bond purchases within two years.

Furthermore, Bank of Japan Governor Haruhiko Kuroda once again adopted a hawkish stance at the press conference following the interest rate decision. Kuroda stated that if the price outlook becomes a reality, the Bank of Japan will raise interest rates again. He mentioned that 0.5% is not a specific upper limit for interest rates, stating, "There is still a lot of uncertainty about Japan's natural interest rate. What we can say is that short-term interest rates are still far below the level that might make people doubt whether we are close to a neutral level."

Following the unexpected interest rate hike by the Bank of Japan and Kuroda's hawkish comments, most Bank of Japan watchers are reassessing the interest rate trajectory and bringing forward the timeline. A survey conducted on Thursday showed that out of 41 surveyed economists, around 68% expect Japan's policy rate to rise from 0.25% to 0.5% by the end of this year.

Former Bank of Japan board member Sayuri Shirai stated that the significant policy shift by the Bank of Japan this week makes it highly likely for another rate hike in October and potentially in January next year. She pointed out that the Bank of Japan's current basic stance seems to be that as long as the economy is not significantly impacted, they can continue to raise interest rates due to extremely low real interest rates. She added, "This is a huge change, driven by the weak yen and widespread wage increases. I myself have had to make significant adjustments to my views." Currently, the Bank of Japan's policy rate is at 0.25%, still far below the recent core inflation rate of 2.6%.

The decline in the Japanese stock market on Friday was partly influenced by the overnight drop in US stocks. On Thursday, all three major US stock indices fell, with weak economic data in the US once again raising concerns about the possibility of a recession.

Data shows that the number of initial jobless claims in the US for the week ending July 27 was 249,000, exceeding market expectations of 236,000 and the previous value of 235,000. The US ISM Manufacturing PMI for July was 46.8, hitting a new low since November 2023, below the expected 48.8 and the previous value of 48.5. US construction spending in June fell by 0.3% month-on-month, the largest decline since October 2022, compared to the market expectation of a 0.2% increase, with the previous value revised from -0.1% to -0.4% These economic data have raised concerns, as the suppressive effects of high interest rates on the economy continue to show, the slow action of the Federal Reserve may pose risks to the U.S. economy. Jeffrey Gundlach, founder of DoubleLine Capital, known as the "new bond king," has stated that the Fed should have initiated a rate cut cycle at Wednesday's policy meeting. He believes that when the Fed truly starts cutting rates, it may already be too late. He explained that the U.S. economy is not as strong, the labor market is weakening, partly due to the rising unemployment rate.

Companies like Amazon (AMZN.US) and Intel (INTC.US) also reported disappointing earnings after the U.S. stock market closed on Thursday. Intel's third-quarter performance outlook was disappointing, and they announced a layoff of 15,000 employees. Amazon's third-quarter profit guidance was also below expectations.

Jose Torres, Senior Economist at Interactive Brokers, stated: "As many economic factors converge, the market is approaching panic mode, supporting investors fleeing from risk assets." "The headwinds in this market are too strong, especially considering that stock pricing is perfect."

Meanwhile, as investors increase their bets on a Fed rate cut, U.S. bonds continue to rise. The yield on the two-year U.S. Treasury note, sensitive to policy changes, hit a 14-month low, while the benchmark 10-year U.S. Treasury yield continued to decline after falling below 4% yesterday.

Investors are currently closely watching the U.S. July non-farm payroll report to be released tonight to understand the condition of the U.S. labor market. The market currently expects that the U.S. non-farm payrolls for July will add 175,000 jobs (previous value was 206,000), average hourly earnings will grow by 3.7% year-on-year (previous value was 3.9%), and the unemployment rate will remain steady at 4.1%.

Chris Senyek, Chief Investment Strategist at Wolfe Research, stated: "In the past few months, the labor market has been sending warning signals. History shows that Powell has taken a very delicate path of waiting too long before starting rate cuts until it's too late."