Why has the Japanese stock index NIKKEI corrected by over 15% and what could be its implications on Indian markets?

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Japanese markets are about to close for the day and I have woken up to the concerning news of the NIKKEI index crashing 6% today.

This isn’t sudden though. The correction began three weeks back.

To give you a backdrop, the Japanese stock market had not broken its previous high in 25 years. This was an isolated global example where an index of a major economy had given negative returns for 25 years, contrary to the proverbial cliche – time in the market is more important than timing in the market.

All of it began to change lately as the NIKKEI index began to show signs of a strong resurgence. This came on the backdrop of three most important factors:

  1. Shift in Monetary Policy: The Bank of Japan changed its monetary policy to aggressive and injected liquidity in the markets with negative interest rates.
  2. Weakening Yen: Japanese Yen corrected by over 50% in the last fifteen years, making Japanese exports more and more competitive over time.
  3. Increased Foreign Investment: Foreign ownership in Japanese stocks reached its highest ever number in early 2024. This came on the back of a weakening Yen and Bank of Japan’s changed monetary policy stance.

But all of it began changing recently.

  1. Shift in Monetary Policy stance: Bank of Japan revised interest rates and raised it to 0.25%, the highest levels since the 2008 Lehman Brother crisis. This sucked a lot of liquidity out of the stock markets. This was done in order to combat a rising inflation.
  2. Strengthening Yen: The Yen strengthened lately owing to weakened liquidity in the broader markets.
  3. Decreased Foreign Investment: With US bond yields on the rise and macroeconomic shift in the Japanese markets, at least in the prevailing circumstances, forced some of the foreign investors to flee Japan.

Consequently, the NIKKEI index has seen a sharp correction in the last three weeks. The index has corrected by over 15%.

Impact on the Indian Markets

Now that we have seen why the Japanese indices have corrected by over 15%, what could be its possible implications on Indian stock markets?

Given the interconnectedness of the global markets, a sharp correction in NIKKEI is sure to have at least some impact on the Indian stocks.

On the negative side of course, if the foreign investors are fleeing Japan owing to some global factors, India won’t stay completely untouched by it. FIIs might continue pulling out of the Indian markets, continuing on the trend set in the last few years. How much of it will impact our indices remains to be seen.

A weakening yen could also trigger a weakening in Rupee, the same goes for strength, as Yen and Rupee are affected by almost the same global factors.

On the flip side, the foreign investors moving their money out of Japan might decide to park it in Indian assets, owing to their perceived attractiveness. This could trigger a sharp upmove in the indices as DIIs are continuous buyers and with the FIIs joining forces, it could push the indices even higher.

The next few days are interesting indeed.

155 thoughts on “Why has the Japanese stock index NIKKEI corrected by over 15% and what could be its implications on Indian markets?”

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