Southern Finance 21st Century Economic Report Journalist Hu Huiyin
Affected by signs of further escalation in the Middle East situation and a sharp rise in oil prices, the Japanese stock market experienced a &#34;Black Monday.&#34;
On March 30, the Tokyo stock market opened lower, dropping more than 5% at one point. After a slight easing in the afternoon, it closed down 2.79% at 51,885.85 points. Due to Japan's heavy reliance on Middle Eastern oil, investor concerns about stagflation have intensified, leading to a &#34;triple kill&#34; in Japan's financial markets involving stocks, bonds, and currency.
On March 30, yields on government bonds of various maturities in the Tokyo bond market continued to rise. The yield on Japan's 20-year government bonds rose to 3.308%, the yield on 30-year government bonds increased to 3.79%, and the yield on 40-year government bonds reached 4.033%. In the Tokyo foreign exchange market, the yen continued to weaken against the dollar, maintaining a rate of 1 to 159.7 after falling below the 160 mark the previous day.
&#34;The current 'triple kill' situation in Japan's stocks, bonds, and currency is unusual and warrants high vigilance,&#34; said Sun Lijian, director of the Financial Research Center at Fudan Development Institute, in an interview with the 21st Century Economic Report. He noted that the oil shock is a supply-side issue, and the combination of economic stagnation and inflation has become a typical stagflation risk. If capital outflows occur, the problem will become even more complicated.
The &#34;triple kill&#34; situation in Japan exposes the deep vulnerabilities of its economy. Amid multiple uncertainties, market expectations for an interest rate hike in April have significantly increased. However, in a question-and-answer session in the Japanese Diet on March 30, Bank of Japan Governor Ueda Kazuo did not explicitly commit to an immediate rate hike but emphasized how to manage potential risks during the rate hike process, reflecting the central bank's dilemma. A deeper concern is that the economic policies promoted by Prime Minister Kishida Fumio are facing greater scrutiny.
On the morning of March 30, Japan's financial market fell into panic, with the Nikkei 225 average price index dropping more than 5% at one point, and the Tokyo Stock Exchange stock price index falling over 4%. In the afternoon, the decline gradually eased, and the Nikkei 225 index ultimately closed down 2.79%.
On that day, Tokyo Electron and Advantest, which belong to the semiconductor products and equipment sector, fell by 1.15% and 5.19%, respectively, while Toyota Motor Corporation, representing the manufacturing sector, dropped 1.52%. From a sector perspective, most of the 33 industry sectors on the Tokyo Stock Exchange declined, with significant drops in securities and commodity futures trading, transportation machinery, glass, and stone products.
In fact, over the past month, the Tokyo stock market has experienced multiple rounds of significant declines. Since March 2, the Nikkei 225 index has fallen nearly 7,000 points. Sun Lijian believes that there are three main reasons for the decline in Japanese stocks. He stated that first, Japan's dependence on Middle Eastern energy is extremely high, especially for oil imports. Most of its energy supply comes from Middle Eastern countries such as the UAE and Saudi Arabia, and transportation routes are heavily reliant on the Strait of Hormuz. As a major manufacturing country, disruptions in oil supply pose significant pressure on its traditional advantageous industries such as automobiles, as well as on emerging industries like semiconductors and electronics, which the Japanese government advocates
Secondly, in recent years, a large amount of overseas capital has flowed into Japan, targeting emerging industries. Previously, even when the Japanese stock market fell, the foreign exchange market would rise, indicating that funds were not leaving Japan; rather, there was a pattern of stock market gains and yen depreciation. However, the simultaneous decline of the &#34;three markets&#34; is indeed abnormal, causing a comprehensive drag on key sectors such as automobiles, semiconductors, and finance, thereby affecting corporate profits.
Thirdly, market expectations have reversed. Previously, the market was generally optimistic, believing that the tensions in the Middle East would not last long, but the reality has shattered this expectation, leading to a spread of panic. Investors have shifted from a &#34;buying on dips&#34; mentality to a general wait-and-see approach. This uniform reversal of expectations is very dangerous and may prevent the Japanese economy from escaping deflation, instead facing new dilemmas.
With the severe fluctuations in global financial markets, in recent years, the Japanese stock market has been viewed as a &#34;safe haven&#34; to avoid the high volatility and geopolitical risks of the U.S. market. However, due to concerns that rising oil prices will hit the Japanese economy, foreign capital has begun to sell Japanese stocks, and its &#34;safe-haven asset&#34; effect seems to be gradually losing effectiveness. Data from the Japan Exchange Group shows that in the week ending March 13, overseas investors net sold approximately 491 billion yen (about 3.1 billion USD) of Japanese stocks, the largest single-week net sell-off since September of last year.
&#34;With the global risk aversion sentiment rising, foreign capital continues to sell Japanese stocks, forming a negative cycle of stock market decline, yen depreciation, and capital outflow, which has amplified the decline of Japanese stocks,&#34; said Xiang Haoyu, a distinguished researcher at the Institute of Asia-Pacific Studies of the China Institute of International Studies, to the 21st Century Business Herald.
What draws attention is that this decline in Japanese stocks is not merely a stock market adjustment but is accompanied by a simultaneous collapse in the bond and foreign exchange markets. Japanese bonds are frequently being sold off. In this regard, Xiang Haoyu stated that the rise in Japanese government bond yields is partly due to the warming expectations of a rate hike by the Bank of Japan in April, pushing up short- and medium-term interest rates; additionally, the Japanese government's expansionary fiscal policy has led to an increase in government bond issuance, raising market concerns about fiscal sustainability, resulting in a massive sell-off of long-term government bonds.
As for the yen, its decline has been rapid, with the yen against the dollar once falling below the 160 mark, reaching the lowest level since July 2024. Xiang Haoyu indicated that the core driving factors behind the yen's decline are the extreme divergence in U.S.-Japan interest rates and the impact of the Middle East situation. The Federal Reserve maintains high interest rates due to inflation, delaying the interest rate cut cycle, while the Bank of Japan kept the rate unchanged at 0.75% in March, leading to large-scale carry trades where investors borrow low-interest yen to exchange for dollars, continuously suppressing the yen. At the same time, rising oil prices exacerbate Japan's trade deficit, forcing companies to sell yen to pay for import bills, creating a vicious cycle of &#34;rising oil prices - yen selling - currency depreciation.&#34;
Although the Bank of Japan decided in March to maintain the policy interest rate unchanged, currently, the internal differences within the decision-making body regarding Japan's inflation outlook and policy path are significantly widening, with a more hawkish stance than before.
According to Xinhua Finance, on March 30, during a parliamentary Q&amp;A, Bank of Japan Governor Kazuo Ueda conveyed a &#34;controllable hawkish&#34; signal to the market. He did not directly promise an immediate rate hike but emphasized how the central bank manages potential risks during the rate hike process, particularly the risk of long-term interest rates getting out of control and the inflation pressure brought by currency depreciation. He stressed that if the short-term policy interest rate can be raised at a &#34;suitable pace,&#34; then long-term interest rates will maintain a &#34;stable trend.&#34;
Conversely, if short-term interest rates are not adjusted properly and fail to effectively curb inflation, leading to excessive inflation, there is also a risk of &#34;over-adjustment&#34; in long-term interest rates.
The concerns of the Bank of Japan are understandable, as deciding to raise interest rates prematurely could lead to more severe consequences. Sun Lijian stated that the Bank of Japan is in a dilemma; if it does not raise interest rates, the depreciation of the currency and imported inflation pressures will be difficult to resolve; if it rashly raises interest rates early, it may exacerbate a vicious cycle, increasing corporate financing costs, worsening debt burdens, and putting pressure on stock market valuations, which could lead to intensified market sell-offs and deteriorating market expectations, further shrinking real income.
Specifically, Xiang Haoyu believes that the rising financing costs for small and medium-sized enterprises, combined with wage pressure, may trigger a wave of bankruptcies; the burden on mortgage households will increase, squeezing disposable income; and the increase in government debt interest payments will exacerbate fiscal sustainability risks.
Even so, several institutions, including BNP Paribas and Barclays, believe that the probability of the Bank of Japan raising interest rates in April is significantly increasing. Lei Wang, an analyst at Thornburg Investment Management, pointed out that what is concerning now is the spiral rise in Japan's wage levels, pricing behavior, and inflation expectations. Recent strengthening of output gap and price trend data further strengthens the rationale for the Bank of Japan to raise interest rates in April.
Pang Zhongpeng, an expert on Japanese issues at the Institute of Japanese Studies of the Chinese Academy of Social Sciences, told the 21st Century Business Herald that if Japan's pace or magnitude of interest rate hikes goes out of control, it could easily trigger a fiscal crisis, a wave of corporate bankruptcies, capital flight, and turmoil in global markets. Therefore, the market generally expects it to adopt a &#34;very slow, very small step&#34; gradual approach to balance multiple objectives.
What economic data will be key to the Bank of Japan's interest rate decision? Sun Lijian stated that the first is the relationship between wages and inflation. Although in the fiscal year 2025, large Japanese companies are raising wages by 5.25% and small and medium-sized enterprises by 4.65%, both reaching multi-year highs, inflation may erode wage increases, and real wages have been in negative growth for several months, which will suppress demand and squeeze corporate profits. The second is whether the inflation level can stabilize above the 2% target, confirming that the economy has truly emerged from deflation. The third is economic growth momentum; current GDP growth rates and manufacturing PMI indicators remain weak. The most concerning risk is stagflation. If the above three points are not ideal, government policies will be difficult to implement effectively and can only rely on structural adjustments for slow recovery. Additionally, external factors such as the Middle East conflict, U.S. tariff policies, and the dollar's movements may have a more significant impact on the Japanese economy than internal factors.
The rise in energy prices triggered by the U.S.-Israel conflict will not only exacerbate Japan's imported inflation pressures but also highlight the policy drawbacks and structural vulnerabilities of &#34;Kishida Economics.&#34;
Since taking office, Japanese Prime Minister Fumio Kishida has begun to implement &#34;Kishida Economics,&#34; focusing mainly on three aspects: first, monetary easing policies; second, so-called &#34;responsible active fiscal policies&#34;; and third, &#34;achieving growth through bold crisis management investments.&#34;
Sun Lijian stated that the &#34;first arrow&#34; was used during Abe's era to combat deflation, but in the current context of rising inflation and potential economic stagnation, continued easing may exacerbate inflation and create structural mismatches. The &#34;second arrow,&#34; namely active fiscal policy, faces issues with fiscal sources
On one hand, there is a need to fulfill tax reduction promises, such as lowering consumption tax; on the other hand, the expansion of expenditures in multiple areas has led to an increase in fiscal deficits, which may even lead to compensating for the deficit through money printing, effectively reducing the purchasing power of the public. This contradicts the fiscal discipline that developed countries should uphold. The &#34;third arrow&#34; is crisis management investment, with the Japanese government's original intention to invest in semiconductors, artificial intelligence, green energy, etc., but in reality, a large amount of funding has been used for defense spending.
Pang Zhongpeng further stated that rising energy prices have increased the burden on people's livelihoods, forcing the government to increase subsidies such as electricity and gas assistance, but fiscal space has been severely limited due to high debt. After all, by 2025, Japan's national debt is expected to account for 235% of GDP. Additionally, semiconductor projects led by the Japanese government, such as Rapidus, although strategically significant, have unclear profit prospects in global competition and may exacerbate public debt risks.
Currently, the Japanese economy is facing a series of thorny issues, including slow growth, the highest public debt in the world, and ongoing population aging. However, &#34;Abenomics&#34; has not been effective, and instead, it seems like a &#34;desperate attempt to find a cure for a disease.&#34;
Sun Lijian believes that the policy prescriptions of &#34;Abenomics&#34; are structurally mismatched with reality. Pang Zhongpeng also pointed out that against the backdrop of rising energy prices, Abenomics' &#34;three arrows&#34; not only have &#34;limited effects&#34; but may also exacerbate the risk of stagflation. The policy mix appears structurally imbalanced under the triple pressure of high inflation, high debt, and weak growth, and market confidence has begun to waver. Without significant policy adjustments in the future, the Japanese economy is likely to fall into a deeper predicament

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The Japanese stock market faced a "Black Monday" due to the escalation of the Middle East situation and rising oil prices, closing down 2.79% on March 30. Bond market yields rose, with the 20-year government bond reaching 3.308%. The yen continued to weaken against the dollar, maintaining a rate of 1 to 159.7. Experts from Fudan University pointed out that the current "triple kill" situation of stocks, bonds, and exchange rates reflects the fragility of the Japanese economy, with increasing risks of stagflation. Market expectations for interest rate hikes have warmed, but the central bank governor has not made a clear commitment to raise rates, indicating a policy dilemma

Japan's stocks, bonds, and currency face a "triple kill," as foreign capital flees