Japanese Financial Markets Show 'Triple Weakness' as Stocks, Bond Prices and Yen All Fall

【Financial News Tokyo = Correspondent Hye-jin Seo】Japanese financial markets showed “triple weakness” on the 2nd, with stocks, bonds and the yen all declining simultaneously. The Nikkei 225 Stock Average fell more than 1,900 points intraday, approaching a 2.9% drop, while bond prices declined amid selling of Japanese government bonds, pushing the long-term yield as high as 3.015% at one point. The yen also weakened to the 160-yen-per-dollar range. With international oil prices surging amid worsening tensions in the Middle East, expectations for additional rate hikes in the United States and Japan have intensified, prompting investors to increasingly avoid risk.

At the Tokyo Stock Exchange (TSE), the Nikkei 225 Stock Average ended the morning session at 64,473.16, down 1,742.18 points, or 2.63%, from the previous trading day. Its intraday decline exceeded 1,900 points at one point, bringing the loss close to 2.9%.
As the TSE’s Prime Market remained broadly weak, heavy selling focused on semiconductor and electronic-component stocks, including Tokyo Electron and Advantest Corporation.
Selling pressure also continued in the bond market. The yield on newly issued 10-year Japanese government bonds, a benchmark for long-term interest rates, rose 0.010 percentage point from the previous day to 3.015% at one point. That was the highest level in about 30 years, since 1996. After breaking above the 3% threshold at 3.005% the previous day, the yield set a new high for the second consecutive day.
Selling of government bonds spread across all maturities. The two-year yield reached 1.840%, its highest level since April 1995, while the five-year yield climbed to a record 2.295%. The 20-year yield rose to 3.900%, and the 30-year yield to 4.195%.
The yen also remained weak. In Tokyo foreign-exchange trading, the yen stood at 160.28 per dollar as of 10 a.m., down 0.30 yen from 5 p.m. the previous day. Concerns that higher oil prices would increase crude-import costs, along with dollar-buying demand from importing companies, are weighing on the yen.
The immediate triggers for the triple weakness were worsening tensions in the Middle East and a surge in oil prices. As the United States and Iran exchanged attacks, West Texas Intermediate crude oil (WTI) futures rose to the $92-per-barrel range in Asian trading on the morning of the 2nd. Fears that higher energy prices will reignite inflation and pressure corporate earnings and consumption have led to selling in both stocks and bonds.

Expectations that the Bank of Japan (BOJ) will raise interest rates sooner are also weighing on the market. BOJ Governor Kazuo Ueda said on the 2nd, "When underlying inflation is approaching 2%, we need to conduct policy with greater attention to upside risks to prices than before."
BOJ policy board member Hajime Takata also described this year as the “third phase” of monetary-policy normalization and stressed, "Japan also needs agile interest-rate hikes." In the overnight index swap (OIS) market, the probability that the BOJ will raise its policy rate by 0.25 percentage point at its monetary policy meeting on the 17th and 18th rose as high as 94%.
Rising U.S. interest rates are adding to the pressure. The yield on 10-year U.S. Treasury bonds reached 4.80% at one point on the 1st, its highest level since January 2025. With surging oil prices, expectations for additional rate hikes, rising federal government debt and corporate funding demand for artificial-intelligence (AI) investment all converging, the possibility of the yield breaking above 5% is also being discussed.
The United States is also pressing Japan to normalize its monetary policy. According to the U.S. Treasury, Treasury Secretary Scott Bessent told Ueda, "I strongly support Japan taking decisive market and monetary-policy measures to address the yen's substantial undervaluation."
Market warnings suggest that a stock-market shock could intensify if Japan's 10-year government bond yield exceeds 4%.
Daiki Takei, a strategist at Resona Holdings, told Nihon Keizai Shimbun, "If long-term interest rates rise to 4.3%, that would reflect four rate hikes over the next year," adding, "If rates rise at that pace, the increase in companies' earnings per share (EPS) could be offset."
Expectations for AI investment and improved earnings had so far cushioned the impact of rising rates. However, if rates move into the 4% range, the corporate-earnings growth scenario driving gains in Japanese stocks could also be shaken.
[email protected] Hye-jin Seo Reporter