TOKYO / RankWire.AI / – Japan’s Nikkei 225 declined almost 2% in early trading on Monday amid mounting expectations for increased interest rates. The index dropped 1.97% to 65,096.63 before further losing ground to an intraday low of 64,832.10. The sell-off was primarily concentrated in technology and other rate-sensitive stocks at market open. The broader Topix also experienced an initial dip, falling 0.84% to 4,111.71, before recovering later in the day.
By the close of trading, the Nikkei had regained most of its early losses, ending at 66,311.93, down just 93.63 points or 0.14%. This closing level was significantly higher than the morning low and represented the highest point of the session. The Topix closed at 4,156.29, up 0.23%, reversing its early decline. Market breadth improved as the session progressed, with 131 Nikkei components advancing, 91 declining, and three remaining unchanged. The rebound sharply curtailed a morning drop that had briefly exceeded 2%.
Japanese government bond yields climbed alongside the early stock sell-off. The benchmark 10-year yield reached 2.95% on Monday, its highest since 1996, while the two-year yield increased to 1.73%, marking its highest since April 1995. Short-term yields tend to follow expectations for monetary policy shifts, with bond prices moving inversely to yields. This rise coincided with markets pricing in higher policy rates in both Japan and the United States.
Bond yields hit levels unseen in over thirty years
Technology stocks exerted significant influence on early equity declines, partly due to weakness in U.S. semiconductor shares at the end of last week. The Nikkei’s weighting system, which favors larger technology firms, amplifies their impact on daily movements. Nonetheless, gains elsewhere in the market later helped mitigate the overall decline by the close. Bank shares also outperformed many tech stocks as domestic yields rose. The Topix outperformed the Nikkei during the session, leading to notable differences between the full-day figures and the initial steep decline.
On Tuesday, the Japanese stock market continued to weaken. The Nikkei fell about 1% to 65,646.57 during trading, with semiconductor-related stocks among the main decliners. Additionally, global bond yields and energy prices rose once again, driven by renewed tensions in the Middle East. Brent crude surpassed $91 a barrel as geopolitical tensions lifted oil markets. The yen traded near 160 per dollar, keeping focus on currency movements and inflation. Since Japan imports almost all its crude oil, energy prices remain a key domestic cost factor.
Interest rate dynamics continue to drive Japanese markets
The Bank of Japan increased its short-term policy rate to around 1% in June and maintained that level in July. Its upcoming monetary policy meetings are scheduled for September 17 and 18. Meanwhile, the Federal Reserve emphasized inflation as a primary concern in its latest policy statement. On August 28, its chair noted that U.S. inflation remained above the 2% target. Market expectations for higher interest rates strengthened after these comments, with Japanese government bond yields holding near levels not seen in nearly thirty years.
Although Monday’s official close confirmed the early 1.97% decline of the Nikkei did not persist throughout the session, the index ultimately finished only 0.14% lower, with the Topix closing in positive territory. However, Tuesday saw another decline driven by weakening chip shares and persistently high bond yields. The two-day period experienced significant intraday volatility across Japanese stocks, bonds, and the yen. As the markets entered September, interest rates, inflation, currency trends, and energy prices remained critical factors shaping the financial landscape.