Group 5: What Happened to the Japanese Stock Market in Early August 2024 and Why Did this Happen?

Question 1

what is japan’s economy like

Answer 1

• they are a global leader in manufacturing
• especially in things like automobiles, electronics, robotics, and machinery
• their services sector makes up a significant portion of their GDP including retail and tourism
• they are heavily reliant on exports with major trading partners like the US, China, and other asian countries

Question 2

what is japan’s stock market like

Answer 2

• Nikkei 225 is the primary stock index
• it is one of the world’s largest and most influential stock market index
• the stock market saw lots of fluctuations due to different factors, including global economic conditions, domestic policies, and natural disasters
• the market has been facing a long period of stagnation after the asset bubble burst in the early 1990s

Question 3

what are current challenges in japan

Answer 3

• aging population
• declining birth rates

Question 4

what is the challenge with aging population

Answer 4

• they have one of the oldest populations in the world
• so as people age, the amount of people that are of working age decreases leading to labour shortages, which affects productivity and economic growth
• the aging population also increases healthcare costs and pension liabilities, putting pressure on public finances

Question 5

what is the challenge with declining birth rates

Answer 5

• they have one of the lowest birth rates globally
• because of job insecurity and the high cost of living, couples delay starting families
• the cultural expectations and workplace norms also make it hard for them to have a good work/life balance

Question 6

what are historical events that happened to japan’s stock market before the august shock

Answer 6

• post war recovery
• the economic miracle
• the bubble economy
• the lost decade
• covid
• the shock

Question 7

what was the post war recovery

Answer 7

• happened from 1945-1950s
• after WWII, japan faced significant economic challenges including devastation of war and a lack of resources
• they US provided financial assistance to help stabilize the economy
• the post-war reforms helped with economic growth and set the stage for their economic miracle

Question 8

what was the economic miracle

Answer 8

• happened from the 1950s-1970s
• where japan experienced rapid industrial growth and became the second largest economy in the world by the 1970s
• their growth came from their exports in automobiles and electronics
• it improved living standards, technological advancements, and increased the stock market as investors got confidence in Japanese companies

Question 9

what was the bubble economy

Answer 9

• happened in the late 1980s
• the central bank had low interest rates to stimulate the economy, making it cheap to borrow, and encouraging investment
• because of this, investors believed that asset prices would continue to rise indefinitely, so they started to invest a lot in real estate and stocks
• they didn’t invest for the actual value, but because they thought it would be worth much more in the future
• so the prices of real estate and stocks increased dramatically and everyone borrowed more to invest more which increased prices even more
• the government and central bank didn’t think this was anything bad and thought that the economy was doing well and growth would continue
• but later, the central bank started to raise interest rates as they started to get concerned
• everyone started to move away from thinking that the assets were worth that much and the prices began to fall sharply
• this was bad since a lot of financial institutions invested a lot in real estate; when prices fell, they loose money

Question 10

what is the lost decade

Answer 10

• happened from 1991-2001
• happened after the bubble collapse
• where there was a lot of deflation, low economic growth, and high unemployment
• a lot of prices fell, reducing consumer spending and corporate investment
• it increased debt and because of aging population and low birth rates, its really hard for the economy to recover
• the government reduced interest rates to near zero to try to stimulate the economy but it didn’t really work
• they tried to invest in different projects to increase unemployment and stuff but it just increased debt

Question 11

what is the yen carry trade

Answer 11

• a financial strategy where investors borrow money in japanese yen at low interest rates then they invest the money they borrowed into higher yielding assets in other countries like the US
• this can be done because interest rates in Japan are historically really low, making it really cheap to borrow in yen

Question 12

what happens to a country’s currency when interest rates go up

Answer 12

• the currency usually becomes stronger
• when interest rates go up it means that the returns on investments increase = foreign investors want to get in on the returns and would buy the country’s currency so they can invest there
• that causes the value of the currency to increase, and the currency becomes stronger
• the value of it can also be retained since higher inflation is used to control inflation -> can buy more if the prices are not shooting up
• can also reduce borrowing, which would = less spending and could weaken the currency if it slows down the economy too much

Question 13

what were the leading causes of the august shock

Answer 13

• japan had negative interest starting in 2016 as part of its monetary policy to fight deflation and stimulate economic growth
• the yen carry trade was popular
• but then they started experiencing inflation, and since the yen was weak, it also made imports expensive

Question 14

what happened with interest rates

Answer 14

• japan’s interest rate was -0.1% since 2016, which allowed a lot of people do the yen carry trade
• they then increased it to 0.1% in march to combat deflation and the slipping of the yen
• they then increased it to 0.25% to fight against the dropping of the yen a couple of months later

Question 15

what happened after interest rates rose

Answer 15

• the yen carry trade was no longer effective
• it became more expensive for investors to borrow the yen so investors started to sell a bunch of their securities so they can pay back their borrowing, while at the same time -> affecting the stock markets across different countries that were apart of the yen carry trade
• the nikkei 225 fell sharply from the rate hike -> increased interest rates = more expensive to borrow = reduces corporate profitability expectations
• it dropped over 12%, which was the largest fall since 1987
• the yen appreciated since less money was leaving the country from the reduce in the yen carry trade

Question 16

what should students do to prevent themselves from being affected by something like this

Answer 16

• this incidence reminds people of how interconnected financial markets are
• so investors should diversify their investments to reduce risk

Question 17

what is happening now

Answer 17

• the nikkei is starting to recover
• the bank of japan is planning to keep its interest rates steady