U.S. Stocks Down 10% and Nikkei Below 60,000? Tension Builds Ahead of ‘Super Rate Week’

【Financial News, Tokyo = Correspondent Hye-jin Seo】Financial-market anxiety is mounting ahead of simultaneous rate hikes by the U.S. and Japanese central banks. With the yield on 10-year U.S. Treasury notes nearing 5%, funds betting on lower volatility have grown to their largest level in a year. Although the rate hikes have largely been priced in, concerns are emerging that an indication of further tightening by both central banks could trigger the unwinding of accumulated investment positions and deepen the stock-market correction. In Japan, trading to hedge against the Nikkei 225 Stock Average falling below 60,000 has also surged.
According to Nihon Keizai Shimbun on the 14th, the Federal Reserve System (Fed) will hold its monetary policy meeting on the 15th and 16th, while the Bank of Japan (BOJ) will meet on the 17th and 18th. Markets are pricing in September rate-hike probabilities of approximately 90% and 98%, respectively.

If the Fed raises its policy rate by 0.25 percentage point, it would be the first hike in three years and two months, since July 2023. At the end of last year, markets expected total rate cuts of 1 percentage point by the summer of 2027. They now reflect roughly four rate hikes. In just nine months, the expected rate path has reversed by 2 percentage points.
The outlook for renewed tightening spread after U.S. payrolls increased by 162,000 in August—three times the market forecast—and the consumer price index (CPI) rose 3.4% from a year earlier. Fed Chair Kevin Warsh also signaled the possibility of monetary tightening at the Jackson Hole Economic Symposium on the 28th of last month, saying, "We have work to do" if underlying inflation continues to exceed the Fed’s 2% target.
As expectations for a policy-rate hike spread, U.S. Treasury yields also approached 5%, widely regarded as a risk threshold for the stock market.
On the 11th, the yield on 10-year U.S. Treasury notes briefly rose to 4.99%, its highest level since October 2023. In a Bloomberg survey, about 30% of 122 market participants said U.S. stocks could fall 10% from their peak if long-term yields reached 5.00% to 5.25%. More than 20% viewed 5.25% to 5.50% as a level that could trigger a correction of the same magnitude.
By contrast, the Volatility Index (VIX), known as the fear gauge, stood in the 15 range on the 11th, below the warning level of 20. According to the Commodity Futures Trading Commission (CFTC), speculators’ net selling of VIX futures reached 94,829 contracts on the 8th, the highest level in about a year. Analysts say that if the Fed strongly signals further tightening, pressure to unwind VIX-futures short positions and stock-buying positions could increase.
Japan’s stock market is also on edge over the possibility of a U.S.-led correction. On the 11th, the Nikkei Stock Average (Nikkei 225) fell 1,259 points, or 1.93%, to 64,011, its lowest level in a month. Among October Nikkei 225 options, open interest in put options with a strike price of ¥60,000 stood at 10,976 contracts, overwhelmingly higher than at other strike prices.

The BOJ is expected to raise its current policy rate from 1.0% annually to 1.25% at this monetary policy meeting. It would be the shortest interval between hikes in the tightening cycle that began in March 2024—three months since the previous hike in June. A rate of 1.25% would be the highest level in 31 years, since 1995.
The pace of rate hikes has accelerated as international oil prices exceeded $100 per barrel and Japan’s corporate goods price index rose 7.6% in August. Markets are pricing in a probability of more than 80% that the BOJ will raise rates again by December, and about 60% that it will deliver one additional hike by next March. However, the BOJ still considers financial conditions accommodative even at 1.25%.
Amid expectations of consecutive hikes, the yen-dollar exchange rate fell from around ¥160.10 per dollar on the 1st to around ¥153.80 on the 8th, a decline of more than ¥6. Speculators’ open interest in yen-buying positions also jumped 53% from the previous week to 178,791 contracts, the highest level in nine months. If the BOJ sends a more cautious signal than markets expect, yen-buying positions could be unwound, causing the exchange rate to rise again.
Kyugo Hasegawa, a market economist at Mizuho Bank, said, "Buying the yen is a short-term bet that incurs losses if the yen does not appreciate," adding, "At the BOJ meeting, the message about the pace of future rate hikes has become even more important."
In a survey of 14 foreign-exchange market participants conducted by the Nikkei on the same day, about 80% forecast that after a short-term strengthening of the yen, the exchange rate would end the year above its recent level in the ¥152 range per dollar. They believe that a widening trade deficit caused by high oil prices and delays in additional BOJ hikes could trigger another bout of yen weakness.
Ultimately, the factor that will move markets this week is not the rate hikes themselves but what comes next. Analysts forecast that if the Fed signals further tightening, upward pressure on U.S. Treasury yields and stock-market correction risks could intensify. If the BOJ takes a cautious stance on consecutive hikes, accumulated yen-buying positions could be unwound.
[email protected] Hye-jin Seo Reporter