The Japanese stock market showed a huge decline on Monday across Asian and European equities following a recent weak US jobs report evoking fears of a recession in the economic superpower, and increasing speculation concerning Federal Reserve interest rate cuts. 

The recent US report published on Friday showed a decline in job growth, as only 114,000 jobs were added in June, while the unemployment rate rose to the highest level since October 2021. The lackluster economic data raised concerns that Fed officials may have maintained a high interest rate for over two decades, leading to speculation of a potential economic recession.

Major tech companies such as Amazon and Microsoft experienced a decline in stocks following an AI-fuelled rally, joining several firms facing red stocks, indicating heavy losses on Wall Street.

In a recent meeting held on Wednesday, the US Central Bank stated that slowing inflation and a softening labor market would reduce interest rates, with traders forecasting two or three 25-basis-point reductions before January.

"It's hard to imagine they could stop the Fed cutting in September, with interest instead on whether they support a 50-basis-point move and how rapid cuts will be going forward," Taylor Nugent at National Australia Bank said, highlighting that the Fed does not meet again until September 18.

Japanese stock collapse

The drop in US employment not only impacted the American economy but also financially affected international stocks in several parts of the globe. 

The losses on Wall Street resulted in Japan's stock market index, the Nikkei, decreasing by more than 12% and losing 4,451.28 points, marking the worst loss since the 20211 Fukushima crisis.

Japan's Nikkei and Topix indexes temporarily suspended futures trading in Seoul, which also plunged by more than 8% in stocks, and on the Osaka Exchange in an attempt to ease volatility.

Japan's top government spokesperson, Yoshimasa Hayashi, said it "will continue to stay on its toes and monitor market developments with keen interest," highlighting, "We're aware there are various evaluations regarding the stocks plunge this time around, and about the status of the Japanese economy, but the government will continue its efforts to completely break free of deflation and to transition to a growth-driven economy." 

The yen surpassed 143 per dollar for the first time since January as a result of the US jobs report increasing expectations for an imminent rate cut by the Federal Reserve. 

The worldwide stock market

The Asian and European markets experienced significant declines in their stock exchange, including Taipei undergoing an 8% plunge, while Singapore and Sydney shrank by nearly 5% and more than 3%, respectively. 

Hong Kong and Shanghai also experienced losses with traders dismissing a series of recommendations issued by China aimed at boosting household consumption in the world's second-largest economy. 

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London and Paris went down by over 2%, whereas Frankfurt was down by more than 3%.

There were also large losses in Mumbai, Bangkok, Manila, Jakarta, and Wellington. 

Tech companies faced the largest declines, with Taiwan Semiconductor Manufacturing Company (TSMC) losing nearly 10% in Taipei, while Seoul-listed Samsung and SK Hynix each declined by over 11%, and Tokyo Electron experienced a significant plunge of 18.48% percent in Japan.

Despite the large losses in this sector, tech firms were not the only industry to face significant losses. For example, Toyota underwent a reduction of 13.65%, and HSBC's shares decreased by more than 5%.

Powell says time approaching for rate cut, could be in September

Federal Reserve Chair Jerome Powell indicated Wednesday that the central bank was nearing its first interest rate decrease in four and a half years, which could occur as early as September.

Powell divulged to reporters, "We think that the time is approaching. And if we do get the data that we hope that we get, then you know a reduction in our policy rate could be on the table at the September meeting."

In mid-July, Powell acknowledged that the central bank erred by delaying interest rate hikes until inflation became a major issue, and he promised not to make the same mistake with future rate cuts.

At an event with the Washington Economic Club, Powell admitted, "We essentially overestimated how quickly the economy would return to normal."

He explained that the Fed initially viewed the post-pandemic price increases as "transitory" and believed that inflation would subside on its own without the need for immediate rate adjustments.

"You don't want to intervene with interest rates if something is going to go away quickly," he said. "You look through things like a temporary oil [price] shock, so that was the mistake — it [the inflation] actually didn't reverse itself."

When the Fed began to hike rates, it did so with little restraint, raising them 11 times between March 2022 and July 2023 to clamp down on prices.

For over a decade before the COVID-19 outbreak in March 2020, price growth remained below the Fed’s long-standing 2% annual target. However, the pandemic-induced temporary shutdown of the US economy, coupled with supply chain disruptions and trillions of dollars in government relief spending, drove inflation—measured by the Consumer Price Index (CPI)—to a four-decade high of 9.1% by June 2022.

With the CPI now hovering around 3% per year, the Fed is under scrutiny for when it will decide to cut interest rates.

While Powell refrained from saying when he might consider rate cuts, he did explain to the Washington Economic Club that inflation has "long and variable lags" and why the Fed should avoid waiting too long to ease monetary policy.

"The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%," Powell said.

He also noted that the Fed seeks "greater confidence" that inflation is sustainably moving toward its 2% target.

"What increases that confidence in that is more good inflation data, and lately here we have been getting some of that," Powell added.