A more-than-year-long rally in Japanese stocks, driven by the country’s depreciated currency, hit a wall at the end of the week.
Japan’s Topix index, which includes companies that represent a broad swath of the Japanese economy, fell 6.1 percent, extending losses from the previous day. It was the index’s worst two-day performance since the 2011 earthquake and tsunami. The Nikkei 225 index fell 5.8 percent on Friday.
Analysts noted a “state of panic” in Japanese markets following the Bank of Japan’s decision on Wednesday to raise interest rates for only the second time since 2007. Sentiment worsened on Friday over concerns about the health of the economy and the tech industry in the United States.
The central bank had raised its key rate to a quarter point, up from a range of zero to 0.1 percent. The move bolstered Japan’s currency, the yen, which was trading at approximately 149 to the dollar on Friday, a significant recovery from 154 at the start of the week.
A weaker yen had been good for Japan’s major exporters, inflating their earnings and making Japanese products more competitive globally. Policies including rock-bottom interest rates that kept the yen weak were long a cornerstone of Japanese economic policy.
This dynamic of a weaker yen and rising corporate profits reached a peak in recent years as the yen fell to near four-decade lows against the dollar. Companies like Toyota reported some of the largest profits in Japanese history, attracting investors and sending Japanese indexes to a series of record highs.
Now some economists suggest the trend is reversing.
“It can be understood that the bubble of a weak yen and high stock prices created by the Bank of Japan has entered the process of collapsing,” Takahide Kiuchi, executive economist at Nomura Research Institute, wrote in a note on Friday.
Japanese markets are also grappling with concerns over a potential slowdown in growth in the United States. The S&P 500 index fell 1.4 percent on Thursday. Tech shares also plunged after an announcement from Intel that it would cut 15 percent of its work force.
The U.S. Federal Reserve left interest rates, which are at a more-than-two-decade high, unchanged at a meeting on Wednesday, but analysts expect it to begin lowering rates later this year.
The double punch of a more expensive yen and tech-sector concerns slammed Japanese exporters involved in the semiconductor supply chain. Shares of Tokyo Electron, Japan’s biggest maker of semiconductor equipment, fell 12 percent on Friday.
For Japan, a long-term appreciation of the yen is expected to be largely positive, helping to cool the import-driven inflation squeezing consumers. But analysts view the sudden strengthening of the currency as a blow because of its potential effect on corporate profits.
Japan’s finance ministry said it was closely monitoring the yen’s developments.
“Sudden fluctuations could increase uncertainty in business activities and have a negative impact on people’s lives,” Finance Minister Shunichi Suzuki said in a news conference on Friday.