Japanese Stock Market Stabilizes a Year After Crash, Investors Adjust to New Rate Hike Reality

The historic reversal of the Japanese yen has caused market turmoil and triggered sharp declines in Tokyo and New York stock markets, one year after the event.

On August 5, 2024, the central bank's unexpected rate hike sparked a 12% drop in the Nikkei index, with a loss of over $67 billion. Twelve months later, the Tokyo Stock Exchange is hovering around historic highs, having weathered two major downturns and one massive currency trading reversal.

Although some indicators have returned to near-historical levels this summer, thanks to the Japanese central bank's clear signals, corporate reforms, and better-than-expected US tariffs agreements, market participants are confident that the old scenario won't repeat itself.

"The market's upward environment seems much more stable now," said analyst Pelham Smithers. "I think there is still room for further rate hikes, unlike before when there was no sense of such a possibility."

However, investors still remain cautious about the Japanese yen's exchange rate, as last Friday's 2% surge in response to disappointing US employment data showed.

But the yen's past four weeks of volatility is a far cry from its 10% surge during the same period last year. Compared with the sharp decline triggered by weak US employment data on August 5, 2024, this week's market dip was relatively mild.

According to Anna Wu, cross-asset strategist at Sydney-based investment management company VanEck, this relatively calm state indicates that investors have finally adjusted to the new reality of Japanese interest rate hikes.

"The market has realized that the Bank of Japan will indeed raise rates, but there is still a significant gap between the yen and other currencies, as well as between Japan and the US Federal Reserve," Wu said. This reduces the likelihood of massive currency trading reversals, she added.