Japan Nikkei ends below 26K level on BOJ tightening fears

Japan share market finished in negative territory on the first trading session of the new year, Wednesday, 04 January 2023, due to yen appreciation against the U.S. dollar and fears that the Bank of Japan could move further toward monetary tightening. Meanwhile, weaker-than-expected Chinese manufacturing-related data released during the Japanese holidays as well as overnight losses in U.S. stocks also dampened risk sentiments.

The 225-issue Nikkei Stock Average index declined 377.64 points, or 1.45%, to finish at 25,716.86. The broader Topix index of all First Section issues on the Tokyo Stock Exchange was down 23.56 points, or 1.25%, to 1,868.15. Japanese financial markets were closed Monday and Tuesday due to the New Year holidays.

Market participants became increasingly wary of the BOJ shifting away from its ultraloose monetary policy after it surprised the market in December 2022 with its decision to raise its bond-yield ceiling, a move widely seen as a rate hike.

A news report during the year-end holidays that the central bank is considering revising upward its inflation outlook at its policy meeting later this month also added to the fears, prompting investors to brace for further monetary tightening and a firmer yen.

Shares sensitive to economic fluctuations were lower due to the worsened sentiment. Marine transporter Nippon Yusen fell 6.5% to 2,907.5 yen. Oil explorer Inpex slid 4.2% to 1,337 yen.

Shares of export issues also slipped amid the yen's strengthening trend. Mitsubishi Motors lost 5.5% to 482 yen, while Mazda Motor sank 3% to 975 yen.

Financial stocks rose on hopes that BOJ's potential shift toward a more hawkish stance may lead to higher interest rates and boost their earnings. Mitsubishi UFJ Financial Group gained 4.2% to 926.2 yen. Mizuho Financial Group advanced 3% to 1,912.5 yen.

ECONOMIC NEWS: The manufacturing sector in Japan continued to contract in December, and at a slightly faster rate, the latest survey from Jibun Bank revealed with a manufacturing PMI score of 48.9. That's down from 49.0 in November and it moves further beneath the boom-or-bust line of 50 that separates expansion from contraction.

The greatest influence on decline in the headline PMI number came from its largest component, new orders. Firms registered a reduction in order book volumes that was strong overall and faster than rates recorded over much of the past two-and-a-half years. Weak underlying demand conditions, on both a domestic and global scale, reportedly drove the latest contraction.

Similarly, new export orders fell for the tenth month in a row. It is, however, worth noting that the rates of decline signaled by each index were slightly softer than those recorded in November. In line with the picture for demand, production levels at Japanese good producers decreased in December. The reduction, though slower than November's 27-month record, was solid overall.

CURRENCY NEWS: The yen appreciated to the mid-130 zone against the U.S. dollar in Asian trade on Wednesday, on speculation that the Japanese central bank will revise upward its inflation outlook in its policy meeting later this month. The yen stood at 130.49 against US dollar 0.4% appreciated from previous day close of 131.01, after trading in the range between 129.93-131.43.

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