TOKYO / RankWire.AI / – Japan’s Nikkei 225 declined nearly 2% at the start of trading on Monday as investors reacted to mounting expectations for higher interest rates. The index dropped 1.97% to reach 65,096.63, before falling further to a session low of 64,832.10. The decline was led by technology and other rate-sensitive shares during the early hours. Meanwhile, the broader Topix also experienced an initial dip, falling 0.84% to 4,111.71 before rebounding later in the day.
By the close of trading on Monday, the Nikkei had recovered most of its losses, ending at 66,311.93, down only 93.63 points, or 0.14%. This closing figure was well above the session’s low and marked the highest point of the day. The Topix also finished higher at 4,156.29, gaining 0.23%, reversing its early decline. Market breadth improved as trading progressed, with 131 Nikkei components advancing, 91 declining, and three remaining unchanged. The rebound significantly narrowed what had been a brief morning decline exceeding 2%.
Japanese bond yields increased in tandem with the early downturn in equities. The benchmark 10-year government bond yield reached 2.95% on Monday, its highest since 1996. The two-year yield climbed to 1.73%, marking its peak since April 1995. Shorter-term yields are closely tied to expectations for shifts in monetary policy. As bond prices move inversely to yields, the rise in yields corresponded with a decline in government debt prices. Additionally, markets have priced in expectations for higher policy rates in both Japan and the United States.
Bond yields hit levels unseen in over thirty years
Technology stocks exerted significant influence on the early decline, particularly after U.S. semiconductor shares weakened at the end of last week. The Nikkei’s price-weighted structure amplifies the impact of its largest technology components on daily market movements. However, by the end of the day, gains elsewhere in the market helped to limit the overall decline. Financial shares performed relatively better than many technology stocks as domestic yields increased. The Topix also outperformed the Nikkei during the trading session. As a result, Monday’s full-session figures differed markedly from the steep early losses.
The downward trend in Japanese equities persisted into Tuesday. The Nikkei declined approximately 1%, closing at 65,646.57, with semiconductor-related shares among the main decliners. The Tokyo markets also faced upward pressure from rising global bond yields and energy prices. Brent crude surpassed $91 a barrel amid renewed Middle East conflicts, which lifted oil prices. The yen traded near 160 per dollar, keeping currency and inflation concerns in focus. Since Japan imports almost all its crude oil, energy prices are a key domestic cost factor.
Monetary policy expectations dominate market movements
The Bank of Japan increased its short-term policy rate to approximately 1% in June and maintained this level in July. Its upcoming monetary policy meeting is scheduled for September 17 and 18. The Federal Reserve has similarly emphasized inflation in its latest policy stance. On August 28, its chair stated that U.S. inflation remains above the central bank’s 2% target. Market expectations for higher interest rates strengthened following those comments, while Japanese government bond yields stayed near levels not seen for about thirty years.
Monday’s closing figures confirm that the initial 1.97% decline in the Nikkei did not persist through the entire session. The index ended only 0.14% lower, while the Topix finished in positive territory. However, on Tuesday, the market declined again as chip shares weakened and bond yields stayed near multi-decade highs. These two trading days generated considerable intraday volatility across Japanese stocks, bonds, and the yen. As September begins, interest rates, inflation, currency fluctuations, and energy costs continue to be the key variables shaping market sentiment in Japan.