Nikkei 225 slides down 2% as Japan navigates inflation fears

Risk Warning: The information in this article is provided for general informational and educational purposes only. It does not constitute investment advice, a personal recommendation, an offer, or a solicitation to buy or sell any security, financial instrument, or product. Investing in equities, indices, ETFs, and other financial instruments involves a significant risk of loss and is not suitable for every investor.

Japanese’s main stock index Nikkei 225 slid downwards by more than 2% in trading hours on Friday, as the Bank of Japan (BOJ) navigates fears on inflation and its possible effect on energy prices, which in turn affects common household goods. At close of trading hours, the Nikkei was down 1.99%.

For now, official government reports show the major pullbacks in spending in terms of categories were in transportation and communication, as Japanese households cut back on spending for the fourth consecutive month. 

The drop in spending was in line with economic forecasts, dropping by 1.3%. Residents opted on an economic scale to put more of their money into housing and health care, while food, utilities, and clothing also caused a slump in spending. 

The Japanese Yen, known historically for its low interest rate, has historically been used in carry trades due to its interest rate differentials with other higher-interest rate currencies such as the U.S. dollar and the Euro.

However, traders often take on currency risk when making this carry trade, as the Japanese Yen can slide in value eroding gains on their positions. With inflation seen as likely on the cards, these trades have historically seen reduced returns in similar conditions if fears on oil pricing do not subside.

Alongside inflation fears, Japan also has another issue to reckon with: encouraging residents to spend in a time when wage growth remains strong. 

Japanese yen currency pair fluctuations show mixed signals with the USD and the Euro.

• USD-JPY: +0.08%
• EUR-JPY: -0.17%

The global trend of inflation now seems to be affecting the fiscal outlook across multiple countries in Asia. Countries are now trying to protect their residents from facing too much inflation. 

However, certain indicators are still up globally, such as American stock indexes (S&P500, DJIA, Russell 2000, NASDAQ) while commodities (crude oil, gold) are down, suggesting that downturns in stocks on a daily basis are more likely to be region specific rather than a broad dip in stocks globally. These dips seem to be caused based on incoming information from government entities about spending levels, negative currency fluctuations, and economic outlook. 

The interest rate for the Japanese Yen still remains one of the lowest at 0.75% but is still its highest since 1995. 

When interest rates shoot up on government bonds, they’re usually rolled out to discourage spending. For now, getting inflation to cool in each economy seems to be the priority for India and Japan, as these currencies are already quite low in value to other common major-pair currencies. 

Final outlook

If energy prices continue to remain elevated, it could be possible likely other countries will change strategy on fiscal management to adjust for potential inflation. Such changes have historically had mixed effects on currency markets, depending on which currency is considered high risk when it comes to depreciation.

Disclaimer: This article reflects the views and analysis of the author at the time of publication and is based on information believed to be reliable from publicly available sources. SGFX makes no representation or warranty, express or implied, as to the accuracy, completeness, or timeliness of the information contained herein, and accepts no liability for any loss arising from reliance on it. Spectra Global is licensed by the UAE Capital Market Authority under Category 5.

References:

• Japan Yields Rise to Multi-Year Highs on Global Inflation Fears - Bloomberg
• Japan Household Spending Falls for Fourth Month Despite Wage Gains - Bloomberg
• Currencies - Bloomberg - Bloomberg Markets
• Index Information - Nikkei Indexes
• Japan Interest Rate