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By Wolf Richter for WOLF STREET.
The Japanese Nikkei 225 stock index plunged 5.7% on Friday, the biggest percentage drop since the Covid crash in March 2020.
Since the all-time high on July 10, the index has plunged 15% and has now re-skidded below the previous all-time high in December 1989.
Since the Bank of Japan meeting on July 31 – a wakeup call for the free-money-addicted markets – over those two trading days, the Nikkei has plunged 8.2%.
But wait… The plunge didn’t even unwind the surge in 2024. Year-to-date, the index is still up 7.3%. And since the beginning of 2023, when this massive rally began, over these 19 months, the index is still up 38%. That’s how huge this stock market craziness has been, even in Japan, with foreigners, from Buffett on down piling into the market.
So the last six-and-a-half months of gains have now been unwound in three weeks, escalator up, elevator down.
The Yen has been rising from the ashes. In early July, the yen had plunged to ¥162 to the USD, its weakest level since 1982, despite repeated, large-scale, and costly interventions by the government.
At that point, from June 2020, the yen had plunged by 34% against the USD, and by 54% since January 2012, when the Bank of Japan kicked off its crazed monetary policies under Abenomics.
With the yen heading further into the netherworld, the BOJ finally did what we’ve been saying for a while it would have to do to save the yen: It got off its crazed monetary policies (at least a little bit).
The BOJ had to choose between its currency – preventing it from collapsing further — and the stock market wealth that foreigners have piled up.
Today, the yen rose to ¥147 to the USD. This is still a low level for the yen that has traded around the 110-range give or take over the past decade. And the strengthening of the yen so far hasn’t been nearly as big a move as the strengthening from late 2022 to early 2023, after which the yen re-collapsed.
Why suddenly?
Generally, we stick to the dictum that markets do what they do because they do it. And they do inexplicably crazy things: For example, the Nikkei spiked by 62% in the 18.5 months from the beginning of 2023 through July 10, as everyone and their dog outside Japan was following Buffett into Japanese stocks and drove up their prices amid massive hype and hoopla in the US media.
And then they got cold feet, after the spike, and they’re selling. So OK. That’s what markets do.
But something big did change: The Bank of Japan in its painfully slow way started backing off from its crazed monetary policy. That wasn’t a surprise. It has been edging into this direction since late 2022 in tiny baby steps, and the stock market just ignored them.
But the last meeting took. On July 31, it raised its policy rate to 0.25%, accompanied by some “hawkish” comments about more hikes, including in 2024. It announced the amounts of its QT plan – QT itself had been announced at the prior meeting, but not the amounts. QT starts now. In fact, it already started as the BOJ’s holdings of Japanese Government Bonds peaked in February and have edge lower since then. Now QT is getting more pronounced, but the phase-in is slow and will go through 2025 before reaching full speed in early 2026 – as slow as it may be, it’s still QT, which is a big change of direction for the BOJ.
Core CPI in Japan has accelerated to 2.6% in June. But the BOJ’s policy rate is only 0.25%, so it is still hugely accommodative, with the “real” policy rate (policy rate minus core CPI) at negative 2.35%.
But the free money is coming to an end. Markets are going to have to absorb the debt that the Japanese government issues and the debt that the BOJ is inching away from.
And perhaps in looking for a safe haven as stocks are selling off, investors have piled into longer-term Japanese Government Bonds, drove up their prices, and drove down yields. Today, the 10-year JGB yield dropped to 0.96%, the lowest since June – pushing it over 1.6 percentage points below core CPI (2.6%). So OK, markets do what they do.
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The post Japanese Stocks Plunge, Yen Rises from the Ashes as BOJ Hikes, Ends Free Money, and Starts QT appeared first on Energy News Beat.
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