Will Bank of Japan’s monetary tightening process be a third-time charm?

August 20, 2024

TOKYO – Last week, the Tokyo stock market experienced historic volatility. The Bank of Japan’s dialogue with the financial markets, which contributed to the turbulence, left a big question mark.

The benchmark Nikkei 225 index plunged a record 4,451 points on Aug. 5 to close at 31,458, a drop that exceeded the Black Monday stock market crash of Oct. 20, 1987. The next day, the Nikkei closed at 34,675, up 3,217 from the previous day’s close, a record increase from one closing to the next.

Since the beginning of this year, the Nikkei has been in an overheated environment and is prone to entering an adjustment phase.

In the spring of 2023, the Tokyo Stock Exchange said it would focus on the price-to-book ratio, which indicates whether a stock is undervalued or overvalued. This policy would require companies to formulate improvement plans to revitalize the market further.

In 2024, an expansion of the Nippon Individual Savings Account program (NISA), in which income from small investments is tax-exempt, has attracted new individual investors and positively affected the Japanese stock market.

The Nikkei began this year at about 33,000 and then began a marked rise. On Feb. 22, it hit its then all-time high of 39,098, breaking the bubble-era record of 38,915 set on Dec. 29, 1989. In the following months, it rewrote the record again and again until hitting its latest all-time high of 42,224 on July 11.

The New York stock market was also overheated. On July 17, the Dow Jones Industrial Average closed at an all-time high of 41,198.

Several factors contributed to the overheating of the stock market.

The Federal Reserve raised its benchmark overnight interest rate to 5.25%-5.50%. However, the U.S. economy had remained