The Nikkei 225 stock average closed up 174 yen, or 0.4%, to 42,807 on Monday, but the early momentum driven by Federal Reserve Chair Jerome Powell’s dovish remarks quickly fizzled out. The index initially surged over 500 yen as Powell hinted at potential interest rate cuts, but the gains were pared back as investor caution took hold. Strong resistance at recent highs, coupled with growing speculation about a Bank of Japan rate hike and a strengthening yen, is weighing on the market.
“Considering the sharp rally in U.S. stocks last week, the reaction in the Japanese market was a bit more muted than one might have expected,” one market analyst noted.
Initial Surge on Fed Rate Cut Hopes
The rally was sparked by comments from Fed Chair Jerome Powell at the Jackson Hole economic symposium in Wyoming. Powell acknowledged downside risks to employment, stating that “an adjustment to the policy stance may be necessary.” This fueled market expectations that the Fed could decide to cut rates as early as the September Federal Open Market Committee (FOMC) meeting to support the economy, triggering a significant rally in U.S. stocks.
The Tokyo market followed suit at the opening bell, with a broad range of sectors posting gains. However, the buying pressure didn’t last. “The growing expectation of a stronger yen became a headwind for Japanese stocks,” said a strategist at a major securities firm, explaining why the Nikkei’s early gains were trimmed.
Yen Surges as Rate Differential Narrows
In the currency market, the Japanese yen appreciated sharply, reaching the low 147-yen level against the dollar on Monday morning. Following Powell’s speech, expectations for a resumption of U.S. rate cuts intensified, causing a steep drop in long-term U.S. Treasury yields. This narrowed the interest rate gap between the U.S. and Japan, leading to a wave of yen-buying and dollar-selling. As of 11:00 a.m., the yen stood at 147.39 to the dollar, a significant gain of 1.21 yen from the previous trading day.
Market Dynamics and Analyst Outlook
The Nikkei opened 343 yen higher and at one point climbed 568 yen to reach 43,201.42. The rally was led by heavyweight semiconductor and tech stocks. However, after the initial buying wave, the market stalled and traded sideways for the remainder of the session. The afternoon saw particularly sluggish trading, with the index moving within a narrow 153-yen range. By sector, non-ferrous metals performed well, while domestic-focused sectors like warehousing, transportation, and utilities declined.
“While expectations for a September FOMC rate cut have increased, the market is now trying to gauge the potential size of that cut,” commented Tatsunori Kawai, Chief Strategist at Mitsubishi UFJ e-Smart Securities. Other strategists noted that the market is now looking ahead to upcoming speeches from other Fed officials for further clues on their stance.
Meanwhile, Bank of Japan Governor Kazuo Ueda, also speaking at the Jackson Hole symposium, remarked that “barring a major negative demand shock, the labor market is expected to remain tight, and upward pressure on wages is likely to continue.” Kawai noted that “the market has taken these comments calmly, and for now, there’s no significant impact on the stock market.”
The broader TOPIX index finished the day up 0.15% at 3,105.49. Trading volume on the Tokyo Stock Exchange’s Prime Market was 4.14 trillion yen. Of the 33 industry groups, 15 advanced, led by non-ferrous metals, wholesale trade, and machinery, while 18 declined. The TSE Growth Market 250 Index edged up 0.62%.
In individual stocks, index giant Fast Retailing saw a modest gain, while SoftBank Group surged over 3%. Advantest and Tokyo Electron also posted gains. Shares of Sumitomo Forestry and TOTO jumped significantly on speculation that lower U.S. interest rates would boost housing demand. In contrast, Terumo and Bandai Namco Holdings traded lower. Overall, market breadth on the Prime Market was nearly even, with 780 issues advancing and 775 declining.
