TOKYO / RankWire.AI / – The Nikkei 225 in Japan declined nearly 2% during Monday’s early trading sessions amid market reactions to increasing expectations of higher interest rates. The index initially fell 1.97% to 65,096.63 before extending its decline to an intraday low of 64,832.10. The decline was primarily driven by sell-offs in technology and other rate-sensitive sectors at the session’s start. The broader Topix also experienced an early drop, decreasing 0.84% to 4,111.71, though it recovered later in the trading day.
By the close of trading on Monday, the Nikkei had regained most of its earlier losses, ending at 66,311.93, down just 93.63 points or 0.14%. This closing level was well above the morning’s lowest point and represented the session’s high. The Topix finished at 4,156.29, showing a 0.23% increase, reversing its initial decline. Market breadth improved throughout the day, with 131 Nikkei components advancing, 91 declining, and three remaining unchanged. The recovery significantly narrowed a morning decline that briefly exceeded 2%.
Alongside the early downturn in equities, Japanese bond yields climbed. The 10-year government bond yield reached 2.95% on Monday, its highest point since 1996, while the two-year yield increased to 1.73%, the highest since April 1995. Shorter-term yields closely reflect expectations for monetary policy shifts. As bond prices move inversely to yields, this rise led to lower prices for government debt. The markets also priced in expectations for higher policy rates in both Japan and the United States.
Bond yields hit levels not seen in thirty years
Technology stocks bore much of the initial pressure after U.S. semiconductor shares weakened at the end of last week. The Nikkei’s weighted structure gives dominant technology stocks considerable influence over daily market moves. By the end of the day, gains in other sectors helped reduce the overall decline of the benchmark. Bank equities outperformed many technology companies amid rising domestic yields. During the session, the Topix also performed better than the Nikkei, leading to significant differences between the full-day figures and the early steep decline.
The negative trend in Japanese equities persisted into Tuesday. The Nikkei dropped about 1% to 65,646.57 during the session, with semiconductor-related stocks among the worst performers. Tokyo markets also saw a further rise in global bond yields and energy prices. Brent crude climbed above $91 a barrel as renewed Middle East fighting pushed oil markets higher. The yen traded near 160 per dollar, keeping currency and inflation conditions in focus. Since Japan imports nearly all of its crude oil, energy prices are an important factor influencing domestic costs.
Interest rate policy remains a key factor in Japanese markets
The Bank of Japan increased its short-term policy rate to approximately 1% in June and maintained that level in July. Its upcoming monetary policy meeting is scheduled for September 17 and 18. Meanwhile, the Federal Reserve continued to emphasize inflation as a central element of its latest policy stance. On August 28, its chair stated that U.S. inflation remained above the central bank’s 2% target. Expectations for higher interest rates strengthened after these comments, and Japanese government bond yields stayed near levels not seen for nearly thirty years.
Although Monday’s official close confirmed that the initial 1.97% decline in the Nikkei did not persist throughout the trading session, the index ultimately ended only 0.14% lower, with the Topix closing in positive territory. However, Tuesday saw further declines driven by semiconductor stock weakness and persistent high bond yields. The two days experienced sharp intraday swings across Japanese stocks, bonds, and the yen. As interest rates, inflation, currency movements, and energy prices remain influential, Japanese financial markets entered September amid heightened volatility.