TOKYO / RankWire.AI / – On Monday, Japan’s Nikkei 225 experienced a nearly 2% decrease during early trading as investor sentiment was influenced by mounting expectations of higher interest rates. The index declined 1.97% to 65,096.63 before further falling to an intraday low of 64,832.10. The initial decline was primarily driven by selling in technology and other rate-sensitive sectors in the morning hours. Meanwhile, the broader Topix index also declined early, dropping 0.84% to 4,111.71, but later recovered within the session.
Most of the Nikkei’s losses were recovered by the close on Monday, ending at 66,311.93, which is 93.63 points, or 0.14%, lower. This closing level was significantly above the morning low and marked the session’s high. The Topix index closed at 4,156.29, up 0.23%, reversing its earlier decline. As trading advanced, market breadth improved with 131 Nikkei components rising, 91 falling, and three remaining unchanged. This rebound notably narrowed a morning decline that had temporarily exceeded 2%.
Alongside the early weakness in equities, Japanese bond yields increased. The benchmark 10-year government bond yield reached 2.95% on Monday, its highest since 1996, while the two-year yield climbed to 1.73%, a level not seen since April 1995. Short-term maturities tend to closely follow expectations regarding monetary policy changes. Since bond prices move inversely to yields, the rise in yields was accompanied by lower prices for government debt. Additionally, markets increased their pricing for higher policy rates in both Japan and the United States.
Yields on bonds hit levels not seen in thirty years
Technology stocks led much of the early decline in equities, influenced by the weakness in U.S. semiconductor shares at the end of last week. The Nikkei’s weighted structure gives significant influence to its largest technology components, affecting daily fluctuations. By the market close, gains in other sectors helped to mitigate the decline of the benchmark. Financial shares, especially banks, performed relatively better amid rising domestic yields. The Topix index also outperformed the Nikkei during the trading session. As a result, the figures for the full day on Monday differed considerably from the steep early drop.
The downward trend in Japanese equities persisted into Tuesday, with the Nikkei falling approximately 1% to 65,646.57 during trading. Semiconductor-related stocks were among the main decliners. The Tokyo markets faced additional pressures from rising global bond yields and increasing energy prices. Brent crude surged past $91 a barrel amid renewed Middle East conflict that pushed oil markets higher. The yen traded near 160 per dollar, keeping currency and inflation concerns in focus. Japan’s heavy reliance on crude oil imports makes energy costs a significant factor domestically.
Interest rate outlook remains crucial for Japanese markets
In June, the Bank of Japan increased its short-term policy rate to around 1%, maintaining this level through July. Its upcoming monetary policy meeting is scheduled for September 17 and 18. The Federal Reserve also emphasized inflation as a key focus in its latest policy statement, with its chair stating on August 28 that U.S. inflation remained above the Fed’s 2% target. Market expectations for higher interest rates strengthened following these comments, while Japanese government bond yields stayed near levels not seen in nearly thirty years.
Monday’s official close confirmed that the initial 1.97% decline in the Nikkei did not continue throughout the day. The index finished just 0.14% lower, with the Topix closing in positive territory. The following day saw another decline, driven by weakness in chip shares and yields near multi-decade highs. These two days of trading resulted in sharp intraday volatility across Japanese stocks, bonds, and the yen. As September begins, interest rates, inflation, currency movements, and energy prices remain dominant factors shaping the markets.