The record-breaking rally in Japanese stocks faced a significant setback on March 11, as concerns over a potential technical recession prompted fears of the Bank of Japan (BOJ) tightening its ultra-loose monetary policy by raising interest rates. This led to a notable bout of profit-taking, causing Japan’s benchmark Nikkei 225 index to plunge around 3 percent, while the broader Topix index also experienced a 3 percent decline. The sharp downturn dragged the Nikkei 225 below the 39,000 level for the first time since February 21.
Revised official data from Japan revealed that the country’s Gross Domestic Product (GDP) expanded by 0.4 percent in the October-December period of the previous year, surpassing the initial estimate of a 0.4 percent contraction. This improved GDP reading is believed to have paved the way for the Bank of Japan to proceed with its plans to raise interest rates. Policymakers at the BOJ are increasingly leaning towards discontinuing negative interest rates, anticipating significant salary increases during this year’s annual wage negotiations.
Bank of Japan Governor Kazuo Ueda, who assumed office last year, has been working towards transitioning away from the unconventional monetary stimulus implemented by his predecessor, Haruhiko Kuroda. Kuroda’s approach has faced criticism for causing significant distortions in financial markets. The BOJ is scheduled to convene a two-day policy-setting meeting on March 18-19 to address these concerns and discuss the potential policy adjustments.
In early March, Japan’s Nikkei index had achieved a historic milestone, reaching a record high not seen in almost 35 years by surpassing the 40,000 mark for the first time. This remarkable rally was primarily fueled by a surge in technology stocks, particularly those related to chipmaking and AI, amid expectations of a forthcoming demand boom. However, it was this same sector of the market that contributed to the downturn observed on March 11.