Japan's Nikkei index fell amid fears of US interest rate hikes and oil prices

Japan's Nikkei index fell on Friday, amid renewed concerns about raising US interest rates and a sharp rise in oil prices that fueled concerns about inflation.

The Nikkei index fell by 1.93 percent to close at 64,011.34 points, recording a weekly decline of 0.4 percent.

The index had previously fallen by 3.16 percent, while the broader Topix index fell by 0.65 percent to reach 4,028.30 points.

US stocks fell during last night's trading, as rising Treasury bond yields and August producer price data strengthened expectations that the Federal Reserve (the US central bank) would raise interest rates. Federal Reserve Chairman Kevin Warsh has signaled a shift in policy away from “forward guidance,” keeping investors on their toes for upcoming inflation numbers. Meanwhile, geopolitical tensions continued as the standoff between the United States and Iran continued to negatively impact energy markets.

“With Fed Chair Warsh signaling a focus on curbing inflation, the wait-and-see approach in the Japanese stock market is likely to strengthen,” Takuma Ikemoto, a market analyst at Tokai Tokyo Intelligence Lab, said in a note.

Shares of the technology sector and companies related to artificial intelligence led the decline in the Nikkei index. Where 95 companies recorded an increase in the index, compared to a decline of 128 companies, while two companies remained unchanged.

The largest losing companies were “Resonak Holding,” which fell by 10.68 percent, followed by “Kioxia Holding,” with a decrease of 6.99 percent, then “Tuban Holding,” which lost 6.95 percent of its value. The biggest gainers were “L-Y”, which rose by 3.44 percent, followed by “Kawasaki Kisen Kaisha”, which rose by 2.94 percent, then “Dai-ichi Life Holding”, which rose by 2.73 percent.

High returns

For its part, Japanese government bond yields rose across various maturities on Friday, in light of selling in global debt markets and increasing expectations that central banks will raise interest rates.

The yield on Japan's benchmark 10-year government bond rose 6 basis points to 2.970 percent. Yields move in the opposite direction to bond prices.

Global bond markets set the general trend, as US Treasury bond yields rose sharply overnight, driven by stronger-than-expected producer price data and higher oil prices, which reinforced expectations that the Federal Reserve would raise interest rates next week.

Takayuki Miyajima, chief economist at Sony Financial Group, said in a note: “High crude oil prices and the weakness of the US Treasury bond market are likely to act as catalysts for selling operations, and upward pressures on interest rates in the domestic bond market are expected to intensify... In the period leading up to the meetings of the Bank of Japan and the Federal Reserve next week, the market is going through a phase of careful assessment of the direction of monetary policy.”

Data released on Friday showed that wholesale inflation in Japan remained high in August, highlighting increasing price pressures that strengthen the Bank of Japan's justification for raising interest rates.

The yield on 40-year Japanese government bonds - Japan's longest-term bond - rose by 3.5 basis points to 4.110 percent, while the 20-year yield rose by 5.5 basis points to 3.805 percent, and the 30-year yield increased by 4.5 basis points to 4.050 percent.

At the short-term end of the yield curve, the yield on two-year bonds - which are most sensitive to interest rates set by the Bank of Japan - rose by 1 basis point to 1.830 percent, while the five-year yield rose by 3 basis points to 2.250 percent.