TOKYO / RankWire.AI / – In early Monday trading, Japan’s Nikkei 225 decreased nearly 2% amid growing expectations of higher interest rates. The index initially dropped 1.97% to 65,096.63 before extending its decline to an intraday low of 64,832.10. The sell-off was mainly concentrated in technology and other rate-sensitive sectors during the opening hours. Meanwhile, the broader Topix also declined early, falling 0.84% to 4,111.71 before later recovering during the session.
By the close of trading on Monday, the Nikkei largely regained its lost ground, ending at 66,311.93, which is 93.63 points lower, or 0.14%. This closing figure was significantly above the morning low and marked the highest point of the session. The Topix finished at 4,156.29, up 0.23%, reversing its initial decline. As trading advanced, market breadth improved, with 131 Nikkei components advancing, 91 declining, and three remaining unchanged. The rebound considerably narrowed the early decline that had briefly exceeded 2%.
Japanese government bond yields increased in tandem with the early stock market weakness. The 10-year government bond yield reached 2.95% on Monday, its highest level since 1996. The two-year yield climbed to 1.73%, marking its highest point since April 1995. Yields for shorter maturities closely follow expectations for changes in monetary policy. Since bond prices move inversely to yields, the rise was accompanied by a decrease in government debt prices. Markets also priced in higher policy rates for Japan and the United States.
Bond yields hit levels unseen in thirty years
Technology stocks largely drove the early decline in equities, following a downturn in U.S. semiconductor shares at the end of last week. The Nikkei’s price-weighted structure means its largest technology stocks have a significant influence on daily fluctuations. By the end of the session, gains across other sectors helped mitigate the initial decline in the benchmark. Banking shares performed relatively better than many technology firms as domestic yields climbed. The Topix also outperformed the Nikkei during the trading day. Consequently, Monday’s full-session figures showed a notable difference from the steep early drop.
On Tuesday, Japanese equities faced additional downward pressure. The Nikkei fell about 1% to 65,646.57, with semiconductor-related stocks among the major decliners. Tokyo markets also responded to rising global bond yields and higher energy prices. Brent crude moved above $91 a barrel as renewed fighting in the Middle East boosted oil markets. The yen traded near 160 per dollar, keeping currency and inflation conditions under close watch. As Japan imports almost all its crude oil, energy prices remain a significant factor affecting domestic costs.
Interest rate expectations continue to dominate Japanese markets
The Bank of Japan increased its short-term policy rate to roughly 1% in June and maintained that level in July. Its upcoming monetary policy meeting is scheduled for September 17 and 18. Meanwhile, the Federal Reserve emphasized inflation as a key focus in its latest policy statement. On August 28, its chair indicated that U.S. inflation remained above the Fed’s 2% target. Market expectations for higher interest rates strengthened following those remarks, while Japanese government bond yields stayed near levels not seen in about thirty years.
Monday’s official closing confirms that the initial 1.97% decline in the Nikkei did not carry through the entire session. The index only finished 0.14% lower, with the Topix ending in positive territory. On Tuesday, another decline occurred as chip stocks weakened and bond yields stayed elevated near multi-decade highs. The two days saw sharp intraday movements across Japanese stocks, bonds, and the yen. Interest rates, inflation, currency movements, and energy prices continued to be key variables as Japanese markets moved into September.