In response to global efforts to combat inflation, multiple central banks raised interest rates, causing a significant decline in Asian shares on Friday. Hong Kong and Tokyo witnessed a nearly 2% drop, while most other regional markets also experienced declines. U.S. futures and oil prices followed suit, moving lower.
Japan, in particular, reported an inflation rate that surpassed expectations, intensifying speculation that the country’s central bank may revise its policies to address upward price pressures. These pressures have led to a significant appreciation of the dollar against the yen. For the past decade, the Bank of Japan has maintained its benchmark interest rate at minus 0.1% to ensure affordable credit and stimulate investment and spending.
The government reported a core inflation rate of 3.2% in May, surpassing the official 2% target when excluding volatile energy and food prices. While signs of inflationary pressure are evident on the supply side, ING Economics noted that it is not yet strong enough to prompt the BOJ to implement immediate tightening measures.
The dollar strengthened against the yen, reaching 143.11 yen, close to its highest level since November. This appreciation of the dollar has implications for Japanese businesses and consumers due to the country’s heavy dependence on imports, as it raises costs.
By midday, Tokyo’s Nikkei 225 was down 1.8% at 32,654.37, while Hong Kong’s Hang Seng fell 1.9% to 18,845.04. In Seoul, the Kospi declined 0.8% to 2,572.33, and Australia’s S&P/ASX 200 gave up 1.2% to 7,110.40. Markets in mainland China were closed for a holiday. Mumbai and Bangkok also experienced declines in their respective stock markets.
On Thursday, despite a majority of stocks falling, the S&P 500 managed to rise 0.4% to 4,381.89. The rebound in technology stocks outweighed losses in other sectors and supported the benchmark index. The Nasdaq composite led the market with a gain of 1% to 13,630.61, driven by gains in high-growth stocks. Meanwhile, the Dow Jones Industrial Average dipped slightly by less than 0.1% to 33,946.71.
In a surprising move, the Bank of England increased its main interest rate by a larger margin than anticipated, reaching a 15-year high. Other central banks, including those in Norway, Switzerland, and Turkey, also raised borrowing rates.
In response to the recent rate hikes, stock indexes in Europe experienced declines. Britain’s FTSE 100 slipped by 0.8% as investors reacted to the Bank of England’s 13th consecutive interest rate increase. This continuous series of rate hikes by the central bank reflects its ongoing efforts to address persistent inflationary pressures.
In the United States, Federal Reserve Chair Jerome Powell reiterated his concerns about high inflation and expressed the possibility of further rate increases. Powell testified before a Senate committee, following his appearance before a House of Representatives committee the previous day.
The Federal Reserve had previously raised interest rates aggressively in 2022 and 2023 to address stubbornly high inflation. While inflation has moderated to some extent since last summer, the Fed has indicated its intention to potentially raise rates twice more this year in order to achieve its target inflation rate of 2%.
Central banks worldwide have been raising interest rates to curb inflation by making borrowing more expensive, but this strategy carries the risk of stalling economic growth and potentially leading to a recession.
In Asia, central banks have started to maintain steady interest rates or, in the case of Vietnam, cut rates, in response to a slowdown in their economies.
High interest rates have already had an impact on the manufacturing sector and other parts of the US economy. Additionally, they have contributed to three notable failures within the US banking system. Despite swift government support, the banking industry continues to face challenges.
According to the Labor Department, the number of Americans applying for unemployment benefits remained elevated, suggesting that the Fed’s rate hikes might be starting to cool the resilient labor market.
In the housing industry, sales of previously owned homes exceeded economists’ expectations, indicating strength in the market.
In trading on Friday, US benchmark crude oil declined by 96 cents to $68.55 per barrel on the New York Mercantile Exchange. On Thursday, it had fallen by $3.02 to $69.51.
Brent crude, the international standard, also dropped by 96 cents to $73.39 per barrel.
The euro was trading at $1.0933, down from $1.0960