Japanese stocks experienced a significant decline on Wednesday, reaching their lowest level in three weeks. This downturn mirrored a broader global sell-off, particularly within the US technology sector. The Nikkei share average, a key benchmark for the Tokyo Stock Exchange, closed 1.04% lower at 23,032.54. The broader Topix index also suffered losses, dipping 0.96% to 1,605.40.
The primary driver behind the decline appeared to be the contagion effect from the US market. On Tuesday, Wall Street witnessed a continuation of the selloff in heavyweight technology companies, pushing the Nasdaq into correction territory. This retreat, fueled by profit-taking after a substantial rally, sent tremors through global markets, impacting investor sentiment in Japan.
Technology-oriented stocks listed in Tokyo bore the brunt of the selling pressure, mirroring the trend observed on Wall Street. However, the magnitude of the decline in Japan was relatively subdued compared to the US. Analysts attributed this to a key difference: Japanese technology valuations were not considered to be as inflated as their US counterparts. Hisashi Arakawa, deputy head of investment management at Aberdeen Standard Investments, emphasized this distinction, noting that the extent of the decline in Japan was comparatively smaller.
Despite initial optimism, attempts to bolster the Japanese market proved ineffective. Market participants had anticipated intervention from the Bank of Japan (BOJ) in the form of purchases of exchange-traded funds (ETFs). Additionally, a rise in e-mini futures for the S&P 500 offered a glimmer of hope for a potential market turnaround. However, these factors were insufficient to offset the dominant selling pressure.
The current downturn comes after a period of relative stability in the Japanese market. In fact, just a day prior, on Tuesday, Japanese shares had exhibited a positive trajectory, climbing to their highest point in three weeks. This upswing was attributed to a combination of factors, including stronger performances by Asian peers and positive domestic political developments. The news that Prime Minister Yoshihide Suga planned to replace an unpopular ally, Toshihiko Nikai, was seen as a move to solidify his support base ahead of crucial upcoming elections. This, along with gains observed in the Chinese market and US futures, had instilled a sense of optimism among investors.
However, the events of Wednesday served as a stark reminder of the interconnectedness of global financial markets. The weakness emanating from the US technology sector proved to be a powerful force, dragging Japanese stocks down from their recent highs. As the situation unfolds, investors will be closely monitoring developments on Wall Street and assessing their potential impact on the Japanese market.