Nikkei plunges below 40,000 as financial stocks drag market lower

Financial Stocks Lead Decline as Nikkei Index Plummets 2%

On August 5, Japan's stock market saw a significant drop in early trading, with the Nikkei 225 index falling more than 2% at one point, eventually breaking below the crucial psychological level of 40,000 points, closing at 39,949.31 points. This marks the first time since June that the Nikkei has fallen below 40,000, signaling a major shift in market sentiment, particularly driven by the financial sector.

With expectations of a U.S. Federal Reserve rate cut rising and increased global yield curve volatility, rapid yen appreciation and a sharp decline in Japanese government bond yields pressured banking and insurance stocks.

Government Bond Yields Dive, Triggering Bank Sector Sell-Off

The yield on Japan's 10-year government bonds plummeted by 8.5 basis points today to 1.465%, marking the biggest single-day drop in nearly three months. This shift directly impacted the net interest margin expectations of local Japanese banks. As leading stocks in the banking sector, Mizuho Financial Group plunged 4.8%, Mitsubishi UFJ Financial Group tumbled 4.6%, and Sumitomo Mitsui Financial also closed down over 3%.

Investors broadly believe the probability of a U.S. Federal Reserve rate cut in September has increased significantly, potentially leading global central banks towards further easing policies, weakening long-term interest rate prospects, which poses a notable downside risk to financial stocks reliant on interest margin income.

Recruitment Giant Recruit Holdings Tumbles Over 5%

Apart from the financial industry, labor market-related stocks also faced selling pressure. The human resources and recruitment platform giant Recruit Holdings fell 5.3%, becoming one of the largest decliners among non-financial stocks.

Analysts pointed out that Recruit Holdings' performance heavily relies on corporate recruitment spending and advertising budgets, and recent weak non-farm employment data from both the U.S. and Japan have cast doubt on the sustainability of economic expansion, consequently dragging down expectations for corporate hiring and labor demand.

Exchange Rate Turmoil: Dollar Falls Below 148 Against Yen

In the foreign exchange market, the yen saw exceptionally rapid appreciation. The dollar-yen exchange rate dropped significantly from 150.54 at last Friday's Tokyo close to 147.60, marking the largest one-day drop in months.

The exchange rate fluctuations further intensified concerns about the profitability of Japanese export companies and increased valuation pressure on financial institutions holding foreign currency assets. As a result, export-oriented manufacturing stocks and forex-sensitive insurance and asset management companies also experienced adjustments.

Investors Await Earnings and Political Signals

Currently, Japan is in the midst of a dense period of second-quarter corporate earnings releases, with the market closely watching earnings outlooks in the consumer electronics, automotive, financial, and technology sectors.

Meanwhile, uncertainties surrounding new policy reform debates in Parliament are drawing political scrutiny. The "Capital Market Reform Plan" and the "Monetary Market Transparency Bill" proposed by the Shib Ata administration are facing fierce disputes between the ruling and opposition parties, and whether they can pass smoothly before the summer session recess will become a potential variable for market volatility in the next phase.

Risk Aversion Demand May Continue to Rise

Analysis agencies believe that the Nikkei's short-term drop below the 40,000-point level may trigger some programmed stop-loss trading, but the overall trend still needs to observe external risk factors such as global inflation data, monetary policy signals, and Middle East geopolitical situations.

Nomura Securities released a research report stating that if U.S. Federal Reserve officials continue to release dovish signals this week, and domestic inflation expectations in Japan remain moderate, then foreign investors may continue to increase their allocation of yen assets, which will, to some extent, suppress the rebound potential of the Nikkei.

The market carries risks, and investment should be cautious. This article does not constitute personal investment advice and has not taken into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at one's own responsibility.