Investors are now blaming Japan's interest rate hikes for much of Monday's horrendous fall in stocks. For about 30 years, the country's very low interest rates encouraged market participants to borrow in Japanese yen and invest the borrowed money without paying interest in risky assets or seek returns by lending money in foreign markets.
After the Bank of Japan raised interest rates to 0.25 percent. borrowing costs rose and the Japanese yen strengthened, prompting some investors to close their positions in borrowed yen and repay debt. These events led to a marked fall in the prices of risky assets, with the Japanese stock index Nikkei 225 falling the most (-14%). Yesterday, the markets calmed down a bit, most European indices rose yesterday, the value of the US S&P 500 index rose by about 1 percent. (but is still down over 3.6% on the week). After yesterday's bounce in the markets, investors continue to be reassured on Wednesday – the Bank of Japan announces that it will not raise interest rates while the markets are so restless. The Nikkei 225 rose about 2.8 percent after the news, with other major Asian stock indexes also rising.
Geopolitical risks remain, but investors are paying more attention to demand risks. After last week's Israeli attacks on the head of Hezbollah in Lebanon and the leader of Hamas in Iran, there are fears of a wider conflict in the region. The most tense situation is between Israel and Iran, Israel is accused of starting the escalation in the region and that the country cannot remain unpunished. Although a response was expected as early as this weekend, the risk of conflict remains high. Oil is usually a good indicator of geopolitical risk, but the potential decline in consumption in the US and China seems more important to markets at the moment. Oil prices are still at their lowest level in half a year, with Brent crude at $76/bbl.
