Japan stocks plunge by nearly 6% in biggest drop since start of pandemic

Hong Kong (CNN) — Japanese stocks plunged Friday as global markets were rattled by worries about the US economy and as traders braced for further interest rate hikes from the Bank of Japan.

The Nikkei 225 ended 5.8% lower, the index’s biggest daily drop since March 2020. It extended a global stock rout that began following the release of weak US economic data. The Japanese benchmark had already lost 2.5% Thursday and has now closed at its lowest level since January.

European markets also opened lower Friday. The benchmark Stoxx Europe 600 index was down 1.4%. Germany’s DAX and France’s CAC 40 were down 1.2% and 0.6% respectively. London’s bank-heavy FTSE 100 was 0.4% lower. US futures were indicating another weak open for Wall Street, with S&P 500 future down 0.9%.

On Wednesday, the Bank of Japan (BOJ) raised interest rates by 15 basis points to 0.25% in its second hike this year and announced plans to taper its bond buying. Traders expect more rate hikes to come later this year as the central bank tries to contain inflation.

“The BOJ made a hawkish shift after its surprising 15 (basis point) rate hike,” said Ken Cheung, director of foreign exchange strategy at Mizuho Securities. “Importantly, the BOJ flagged the inflation upside risks … and left the door open for further rate hikes. ”

The hike has narrowed the difference in interest rates between the United States and Japan, which pushed the Japanese yen higher against the greenback. The dollar has fallen by more than 4% against the Japanese currency since the middle of last month.

On Friday, it weakened further against the yen, down 0.3% to 148.9.

“The risk of rising yen volatility threatens the decade-long bull market of Japanese equities,” Frank Benzimra, head of Asia equity strategy at Societe Generale, said in a research note on Thursday. He added that a rapid appreciation of the currency would hit profits at the country’s exporters.

The yen has broadly weakened over the past four years. It was down 40% against the US dollar and down 30% against the euro during that period.

Combined with strong corporate earnings and effective corporate governance reforms, the weak yen propelled the Nikkei 225 to all-time highs this year.

But as the yen strengthened over the past three weeks, Japanese equities have corrected. The Nikkei is down 12% since July 12.

“From a Japanese equity perspective, the earnings boost from a weak yen is set to diminish,” Citi analysts said on Thursday. But they remained positive about Japanese stocks in the long run, as inflation is gaining traction and a positive “wage-price spiral” is strengthening in the economy.

The hope is that rising wages and prices can help the country shake off years of economic weakness.

Elsewhere in Asia, markets tumbled across the board on Friday. South Korea’s Kospi declined 3.7%. Australia’s S&P/ASX 200 dropped 2.1%. Hong Kong’s Hang Seng Index also lost 2.1%, and China’s Shanghai Composite was down 0.9%.

Overnight on Wall Street, the Dow Industrial Average slid 1.2%, as fresh data stoked fears that the US economy is weakening with interest rates at a 23-year high. The S&P 500 lost 1.4% and the Nasdaq Composite fell 2.3%.

New economic data revealed that first-time applications for jobless benefits rose last week to an estimated 249,000 filings. That’s the highest tally since last August, according to the Labor Department. Meanwhile, continuing claims, filed by people who have received unemployment benefits for at least a week, jumped to 1.877 million. That’s the highest level since November 2021.

“Markets firmed up expectations of rate cuts as weak … manufacturing data showed the [US] economy is meaningfully slowing,” ANZ analysts wrote in a note on Friday. They expect the Federal Reserve to make three rate cuts this year.

The Fed signaled at its policy meeting on Wednesday that a long-awaited rate cut is on the table for September.

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CNN’s Anna Cooban and Krystal Hur contributed reporting.