As we watched our Olympian divers compete for gold last month, another event was making waves as Japan’s equity benchmarks plunged to almost 20 percent from their record highs.
On August 5, spectators watched – jaws dropping – as Japan’s Nikkei 225 took a 12.5 percent tumble into its most spectacular single-session straight dive since 1987.
Nikkei Stock Average (Nikkei 225) 3 month period to 11/09/2024.
Source: https://indexes.nikkei.co.jp/en/nkave/index/profile?cid=3&idx=nk225#section-gist
A few readers may recall ‘Black Monday’ as it was known, on 19th October 1987 when the Dow Jones Industrial Index fell as much as 22.6 percent in one day. It was a market move that sent shockwaves across the globe, including to the Australian share market, which toppled over 40 percent from its peak that year.
This time around, Australian markets responded to Japan’s stock market dive with a 3.7 percent fall – nothing like the falls in 1987, but still its biggest drop since May 2020.
Nikkei Stock Average (Nikkei 225) 5 year period to 11/09/2024.
Source: https://indexes.nikkei.co.jp/en/nkave/index/profile?cid=6&idx=nk225#section-gist
What caused the chaos? It’s complicated. Many factors lead to market falls; it’s never just one thing.
One factor in the Japan stock market drop was the rapid selling of shares by a large cohort of carry traders. Carry trading is a strategy whereby traders borrow money in one currency at a low interest rate – and use it to invest in high growth assets elsewhere (usually offshore).
Japan’s decades-long period of economic stagnation (which began in the 1990s) has seen the country’s central bank – the Bank of Japan (BoJ) – keep interest rates low. In fact, interest rates in Japan have historically been as low as zero, and even negative at times, which has made carry trading a popular strategy among Japanese investors. Many have been able to borrow yen at these low interest rates to invest it in other markets, including to buy shares in big tech companies on the US stock exchange.
The strategy worked well for those traders while interest rates stayed low, and the US market offered strong returns.
Then things changed.
Firstly, US unemployment figures rose higher than expected in July (to 4.3%), making traders nervous about future interest rate rises and a possible US recession.
Secondly, in August, higher inflation figures in Japan prompted the BoJ to raise its interest rates from 0.1 percent to just 0.25 percent. It doesn’t sound like much, but the surprise rate hike was enough to trigger a wave of panic selling among leveraged carry traders and send markets into a freefall.
Image source: https://stocksprediction.com/whats-been-happening-to-the-japanese-stock-market-performance/
Now, before you decide whether to worry about all this, let’s first consider what our Olympic diving judges might say.
If you’d decided to sell your shares just after the market plummeted, you’ve have certainly lost out. A hard one to recover from, say our judges…(Score cards pending.)
It wasn’t long after the 12.4 percent plunge on August 5 that the same market index eventually came back up for air, gaining another 10 percent or so.
So if you’d done nothing but hold your nerve throughout the ups and downs, you’d have made a reasonable recovery already, and – most importantly – stayed in the game.
A 9-out-of-10 for difficulty, say our judges, but a more well-executed technique.
Watching volatile markets dive and recover can at times feel scary, even exciting, but as any elite athlete will tell you, it takes practice to override your nerves and stick to your game plan.
Your life goals should inform your financial decision-making, not financial markets.
Let your values be your springboard … and avoid the financial belly flops.
If you’re looking to jump into a more buoyant financial future, but don’t know where to start, talk to an adviser at Align Financial on 02 9913 9995.
