The Japanese stock market had an eventful session on September 16 that reflected mixed news.
The NIkkei 225 gained 438.90 points (0.69%) to finish at 63,923.00 and the TOPIX also climbed about 0.6% to 4,061.72
The numbers alone are not spectacular. However, investors had reason to be more interested in what took place on this day in the Japanese market.
The U.S. Federal Reserve’s interest rate decision was due, and the Bank of Japan meeting was only two days away
Oil prices were rising, but fresh trade data gave the Japanese export-driven economy something to cheer about.
Therefore, while the Nikkei closed the day higher, investors had cause to remain cautious ahead of these key announcements.
Recovery Toward the End of Day
The Nikkei 225 did not have a strong day from the opening bell to the closing bell.
The index opened at 63,672.13 and dropped as low as 63,209.92 before rebounding and finishing at 63,923.00.
That late-day recovery reflected some investor caution ahead of the Fed’s interest rate decision.
Investors appeared hesitant to take big positions before the highly anticipated statement from the American central bank.
They remained in this cautious mode until futures buying started to push the Japanese stock index higher.
Most investors felt it was best to remain on the sidelines ahead of these two central bank decisions.
Why the Federal Reserve Matters to Japan
It may seem odd that Japanese investors would be interested in decisions made by the Federal Reserve.
However, the U.S. central bank plays an important indirect role in the Japanese stock market.
The Fed was expected to raise its benchmark interest rate by 0.25% on September 18, expanding the target range to 3.75%-4%.
This rate hike would increase borrowing costs for American companies and consumers.
While this appears to be anemic compared to increases taking place around the globe, it still has indirect ramifications for the Japanese stock market.
In particular, changes in interest rates by the Fed affect bond yields and currency values.
An important currency for Japanese investors is the yen.
Japanese investors often buy stocks of companies that are primarily based in the United States.Automobile manufacturers, electronics firms and other exporters also tend to benefit when the yen is weak, since overseas revenues are converted back into yen at a more favourable rate.
Therefore, investors were following what the Federal Reserve decided, and wondering what the implications of these decisions would be on the value of the yen.
Another Plus for Japanese Exporters
Japan’s latest trade data provided investors with another reason to be positive about the Japanese stock market.
Exports rose 19.3% in August from a year earlier, partly due to semiconductor-related products and equipment.
This was an especially welcome development given the current state of the artificial-intelligence boom.
Japan’s AI industry rarely makes headlines. That is not surprising since AI is considered to be an American industry.
However, there are indirect benefits to being in the supply chain for this important industry.
In particular, manufacturers of:
- Advanced chips,
- Semiconductor manufacturing equipment,
- Electronic components,
- Specialised materials
are benefiting from the boom.
Japanese firms are major suppliers in several of these areas of the supply chain. This means that Japan can benefit indirectly from the artificial-intelligence boom, even if its firms are not considered to be major players in the AI industry.
The increased strength of Japanese exports added to the list of reasons why investors were optimistic about the Japanese stock market on this day.
Import Surge Poses a Challenge
However, the same trade data had a negative side.
Japan’s imports rose by about 28% in August compared to last year, more than offsetting the increase in exports. This led to a trade deficit of about ¥1.1 trillion.
Japan imports a large amount of its oil and petroleum products.
Higher energy prices tended to have a dampening effect on the Japanese economy.
When energy prices rise, transportation costs naturally increase. This lowers corporate profits and may result in higher prices for consumers.
Therefore, there was a negative factor weighing on the Japanese economy at the same time that exports were surging higher.
These two factors can exist at the same time.
Stock Indexes Tell a Mixed Story
The movement in the Nikkei 225 masked some of the large swings taking place among individual stocks on this day.
One of the best performing stocks was Eneos Holdings, which advanced nearly 5%. Dainippon Sreen Manufacturing and Idemitsu Kosan also had strong gains, with more than 4% increases each.
However, other stocks took a beating. Mercari fell more than 6% on the day, with Otsuka Holdings down about 4.6% and Sumitomo Dainippon Pharma off about 4.1%.
This highlights an important nuance about stock indexes. When the Nikkei rises 438 points, it does not mean that every single one of the 225 stocks in the index rose.
In reality, individual stocks tend to rise on some days and fall on other days, with the overall performance of the index being a combination of these individual moves.
Looking Closely at the Nikkei 225
The Nikkei 225 is one of the best-known stock market indexes.
It reflects the stock prices of 225 major Japanese companies that are listed on the Tokyo Stock Exchange.
Industries represented in the index include automobiles, banking, the electronics industry, the pharamaceutical indusry, machinery and retailing.
The main characteristic of a price-weighted index is that stock prices have a disproportionate impact on the index. In general, companies with higher share prices tend to have a bigger impact on the index, compared to smaller priced shares.
A notable implication of this is that large-cap stocks tend to have more influence over the movement in a price-weighted index, compared to a market cap-weighted index such as the S&P 500.
The TOPIX, Japan’s other major stock index, tends to cover a broader selection of the Japanese stock market than the Nikkei 225. On September 16, both stock indexes closed higher. That means that the upbeat trend in the Japanese stock market was not limited to the companies included in the Nikkei 225.
The Fed Decision Was Highly Anticipated
For Japanese investors, the most important central bank decision was probably the one made by the Bank of Japan.
The country’s central bank was set to make its interest-rate decision on September 18. At that point in time, investors were assessing the likelihood of another interest rate increase.
It appears that the Bank of Japan followed through on this trend, since the central bank raised its policy rate to 1.25% on September 18.
This placed Japan in a new group of countries in terms of record high interest rates – a position not seen in 31 years.
However, that decision had not yet been made at the time of the Nikkei trade on September 16, which is why investors were still cautious.
Higher interest rates tend to have a mixed impact on the companies in the Japanese stock market. Some firms benefit while others are hurt.
An increase in interest rates tends to benefit financial institutions such as banks. At the same time, higher interest rates tended to hurt exporters such as automobile manufacturers, since the stronger value of the yen meant that their overseas receipts were worth less when converted into local currency.
Therefore, it was not clear whether the Bank of Japan’s decision was positive or negative for the Japanese stock market as a whole.That depends greatly on the individual company.
The Nikkei Had Been Highly Volatile Prior to This Day
The Nikkei’s 438-point increase did not come in a vacuum.
Japanese stocks have been swinging wildly in either direction in recent days. For instance, the Japanese stock market had suffered a large decline in shares prior to this day.
Then, on Tuesday and Wednesday, the market rallied greatly to set up this large increase on Thursday.
On various days, investors were considering:
- Concerns about the health of the global tech industry,
- Uncertain future for the pace of growth in artificial intelligence,
- Movements in US interest rates,
- What the Bank of Japan would decide,
- Increasing oil prices,
- Recent trade statistics
There was no single factor that influenced the Japanese stock market index. Investors were trying to put together a puzzle that involves many varying elements.
What Does it Mean that the Nikkei 225 Closed Higher?
The end result of the daily trading for investors was that the Nikkei 225 finished higher.
However, that increase did not solve many of the problems ahead.
The US interest rate decision could have an indirect impact on the Japanese stock market.
The Bank of Japan’s decision could have a more direct influence. Furthermore, oil prices could jump higher while the value of the yen could swing in either direction.Investors also had to consider whether Japanese semiconductor equipment would continue to be in demand by the global technology industry.In that respect, the 438-point jump in the Nikkei represented only part of the story.The Nikkei Had Gone Up Nearly 439 Points While Investors Were Waiting to See what Would Come Next.What Happened After the Announcements Would Tell Investors Whether Strong Exports and High Demand for Japanese Semiconductor Equipment Would Continue to be a Factor, or If Higher Interest Rates, Rising Energy Prices and a Changing Yen Value Would Begin to Offset these Headwinds.
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