Japan's Nikkei share average is set for its worst week in over a month, dropping 4% due to rising inflation concerns linked to the ongoing conflict in the Middle East. On Friday, the Nikkei fell 0.3%, while the broader Topix index decreased by 0.1%. This indicates a 3.4% weekly drop, marking the largest weekly loss since mid-July.
Key Details
The rising tensions in the region have pushed oil prices higher, with crude oil up by about $2 overnight. Treasury Secretary Scott Bessent said that the U.S. will impose "the toughest sanctions in history" on Iran, adding to market worries. Consequently, Japanese bond yields rose, with the yield on the 10-year government note climbing 3 basis points to 2.875% on Friday. Maki Sawada, a strategist at Nomura Securities, mentioned that profit-taking is likely as investors respond to higher oil prices and bond yields.
In corporate news, major companies like Fast Retailing experienced significant declines, with shares falling 4%. SoftBank Group also dropped by 1.3%. Overall, 119 of the 225 Nikkei components declined, while 103 gained, and three remained unchanged. In contrast, the shipping sector performed well, rising 2.8% due to expectations for increased freight rates from disruptions in the Strait of Hormuz.
Background
Japan's core inflation rose to 1.8% year-on-year in July, matching forecasts and strengthening expectations for a rate hike by the Bank of Japan (BOJ) at its upcoming policy meeting on September 17-18. Analysts believe inflation pressures will continue to grow due to the weak yen and rising raw material costs. Masato Koike, a senior economist at Sompo Institute Plus, stated that renewed tensions in the Middle East will likely push crude oil prices higher, adding to inflation.
Rising inflation and uncertainty from the Middle East conflict are likely to affect Japanese equities and bond yields. Investors may adjust their positions in sectors sensitive to oil prices and inflation, especially in consumer goods and transportation.
Keep an eye on the Bank of Japan's policy meeting on September 17-18, where a potential interest rate hike is expected to be discussed.
Based on reporting by: businesstimes.com.sg