TOKYO / RankWire.AI / – Japan’s Nikkei 225 declined nearly 2% during early trading on Monday amid mounting expectations for increased interest rates. The main index dropped 1.97% to 65,096.63 before extending its losses to an intraday low of 64,832.10. The decline was driven primarily by selling in technology and other rate-sensitive sectors during the opening hours. The broader Topix index also saw an early dip, falling 0.84% to 4,111.71 before recovering later in the session.
By the end of Monday, the Nikkei managed to recover most of its earlier losses, closing at 66,311.93, which was down 93.63 points or 0.14%. This closing level was well above the morning low and represented the session high. The Topix ended at 4,156.29, up 0.23%, reversing its initial decline. Market breadth improved as trading progressed, with 131 Nikkei components advancing, 91 declining, and three remaining unchanged. The rally significantly narrowed a morning decline that had briefly exceeded 2%.
Simultaneously, Japanese bond yields increased alongside the early downturn in equities. The benchmark 10-year government bond yield reached 2.95% on Monday, its highest since 1996. The two-year yield rose to 1.73%, the highest since April 1995. Shorter-term maturities tend to closely follow expectations regarding monetary policy shifts. As bond prices move inversely to yields, the rise in yields resulted in lower prices for government debt. Markets also priced in expectations for higher policy rates in Japan and the U.S.
Bond Yields Hit Three-Decade Highs
Technology stocks were a major source of the early pressure on equities, especially after U.S. semiconductor shares weakened at the end of last week. The Nikkei’s price-weighted structure gives its largest tech components a significant influence on daily movements. However, by the close, gains across other market sectors helped mitigate the decline in the benchmark. Bank shares performed better than many technology stocks amid rising domestic yields. The Topix also outperformed the Nikkei during the session, leading to a notable difference between the full-day figures and the early steep decline.
The negative trend in Japanese equities persisted into Tuesday. The Nikkei fell about 1%, reaching 65,646.57 during trading, with semiconductor-related stocks among the main decliners. Tokyo markets also faced further increases in global bond yields and energy prices. Brent crude surged past $91 a barrel as renewed fighting in the Middle East pushed oil prices higher. Meanwhile, the yen hovered near 160 per dollar, keeping currency and inflation considerations in focus, as Japan imports nearly all its crude oil, making energy costs a key domestic factor.
Interest Rate Policy Remains Key for 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 meeting is scheduled for September 17 and 18. The Federal Reserve also emphasized inflation in its latest policy stance, with Chair Jerome Powell stating on August 28 that U.S. inflation remained above the central bank’s 2% target. Expectations for higher interest rates strengthened following those remarks, while Japanese government bond yields stayed near levels unseen in nearly three decades.
Monday’s official close confirmed that the early 1.97% Nikkei decline did not carry through to the end of the session. The index finished only 0.14% lower, and the Topix ended in positive territory. On Tuesday, the market experienced another decline as chip stocks weakened and bond yields remained near multi-decade highs. The two days saw sharp intraday swings across Japanese stocks, bonds, and the yen. As interest rates, inflation, currency movements, and energy prices continue to influence the markets, Japanese financial assets entered September amidst heightened volatility.