Taking stock of Japan’s historic market crash

A look at the day ahead in Asian and global markets

By Jamie McGeever, Columnist, Global Finance & Markets

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Asian markets open on Tuesday still reeling from a wild session on Monday that saw Japan’s second-biggest stock crash ever spill over into world markets, helping to unleash a wave of volatility usually associated with major crises.

The curious thing is though, there’s no smoking gun that explains the scale of the selloff, either in Japan or globally. At least not a singular or obvious one.

Yes, the yen carry and other leveraged trades were probably overcooked, the Bank of Japan was maybe too hawkish and is now headed for a policy error, ditto the Fed by not cutting rates last week, and the AI-inflated Big Tech bubble on Wall Street was well overdue a reversal.

But is that enough to warrant a 12% plunge in Japanese stocks – a fall only exceeded by the 15% slump on Oct. 20, 1987 after Black Monday – or the surge to 65.0 on the U.S. VIX volatility index, a level only ever topped in the market meltdowns of 2008 and 2020?

Perhaps. 

Graphics are produced by Reuters.

Graphics are produced by Reuters.

But there’s a case to make that it’s excessive. On the economic side, there’s no obvious sign of collapse – Japanese and U.S. services purchasing manager index numbers on Monday showed pretty solid growth. 

Indeed, the U.S. services PMI data was enough to push short-dated Treasury yields higher on Monday, halting the recent decline that had also reached historical magnitudes. 

This is the febrile atmosphere traders in Asia on Tuesday will received the Reserve Bank of Australia‘s latest policy decision, inflation figures from Taiwan and the Philippines, and more corporate results from Japan.

The RBA is widely expected to hold rates at 4.35% but could the current turmoil force a cut? Traders are putting a one-in-10 probability on it.

It remains to be seen whether the current volatility proves to be a market-centric episode wiping out leveraged trades across a range of assets without spilling over into the “real” economy, or something more serious.

There have already been calls in some quarters for an emergency, inter-meeting Fed rate cut and earlier on Monday U.S. rates markets had begun to price in the possibility of just that or a 75 basis point cut next month.

But unless there is a clear deterioration in the economic data or deeper market dislocation, this is unlikely. By the U.S. close on Monday that pricing had eased and the VIX index had halved from its peak.

Classic “safe haven” assets gold and two-year Treasuries ended lower, although the yen hit a seven-month high. It has rallied around 13% in three weeks, virtually wiping out its year-to-date losses. 

Further signs of yen stress and dislocation may come from the cross-currency basis market, a gauge of funding costs and demand for dollars. Traders will be watching.

Graphics are produced by Reuters.

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