TOKYO / RankWire.AI / – Japan’s Nikkei 225 dropped nearly 2% in early trading on Monday as investor sentiment was affected by mounting expectations for higher interest rates. The index fell 1.97% to 65,096.63 before sliding further to an intraday low of 64,832.10. Initial declines were concentrated in technology and other rate-sensitive sectors during the market’s opening hours. The broader Topix also declined early, losing 0.84% to 4,111.71 before rebounding later in the day.
By the close of trading, the Nikkei had recovered most of its early losses, ending at 66,311.93, down 93.63 points or 0.14%. This closing level was well above the morning low and represented the session’s high. The Topix finished at 4,156.29, gaining 0.23%, reversing its initial decline. Market breadth also improved as trading advanced, with 131 Nikkei components gaining, 91 declining, and three unchanged. The rebound significantly narrowed a morning dip that had briefly exceeded 2%.
Simultaneously, Japanese bond yields climbed alongside the early weakness in equities. The benchmark 10-year government bond yield reached 2.95% on Monday, its highest point since 1996. The two-year yield increased to 1.73%, a level not seen since April 1995. Shorter-term maturities tend to closely reflect expectations for monetary policy adjustments. As bond prices and yields move inversely, this rise in yields was accompanied by falling government debt prices. Additionally, markets priced in expectations for higher policy rates in both Japan and the U.S.
Bond yields reach three-decade peaks
The initial decline in Japanese equities was largely driven by weakness in technology shares following the downturn in U.S. semiconductor stocks at the end of the prior week. Given its price-weighted structure, the Nikkei is highly influenced by its largest technology components. However, gains in other sectors later helped limit the overall decline, with bank stocks outperforming many technology shares as domestic yields rose. During the session, the Topix outperformed the Nikkei, which led to a notable difference between the full-session figures and the sharp early drop.
The bearish trend in Japanese stocks persisted into Tuesday, with the Nikkei dropping around 1% to 65,646.57 during trading. Semiconductor-related shares were among the main decliners. The markets also faced another increase in global bond yields and energy prices. Brent crude surpassed $91 a barrel as renewed Middle East conflict lifted oil markets. The yen hovered near 160 per dollar, keeping currency and inflation conditions in focus. Japan’s dependence on crude oil imports makes energy prices a key domestic cost factor.
Interest rate outlook remains key
The Bank of Japan increased its short-term policy rate to approximately 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 continued to emphasize inflation in its latest policy stance. On August 28, its chair stated that U.S. inflation remained above the Fed’s 2% target. Expectations for higher interest rates strengthened following those comments, while Japanese government bond yields stayed near levels not seen in about thirty years.
Monday’s official close confirmed that the early 1.97% Nikkei decline did not persist through the full session, as the index only fell 0.14% and the Topix posted gains. Tuesday’s trading saw another decline amid weakening chip shares and persistent high bond yields. The two days created significant intraday fluctuations across Japanese equities, bonds, and the yen. As September begins, interest rates, inflation, currency movements, and energy costs continue to be crucial factors shaping Japanese financial markets.