Differences Between Japan and US Stock Markets

The Japanese and US stock markets have distinct characteristics and respond differently to various economic factors, reflecting the unique economic landscapes of each country. Here, we will explore the recent developments and key differences between these two significant financial markets.

1. Interest Rates and Currency

One of the primary factors influencing the Japanese stock market is the country's interest rate policy. Unlike the US, which has seen interest rates rise significantly in recent years, Japan has maintained relatively low interest rates. This policy, aimed at combating deflation, has led to a strong yen, which in turn affects the competitiveness of Japanese exports. For instance, following the election of new Prime Minister Shigeru Ishiba, who is an advocate for increasing interest rates to combat inflation, the yen strengthened, and Japanese stocks experienced a decline. This is because a stronger yen makes Japanese exports less competitive in the global market, which can negatively impact stock prices.

In contrast, the US has seen more aggressive rate hikes, which have bolstered the dollar and impacted various sectors differently. The current interest rate environment in the US has been driven by inflation concerns and the need to stabilize the US economy, whereas Japan's focus has been on managing deflation and supporting economic growth through monetary policies.

2. Semiconductor Industry

The semiconductor industry plays a crucial role in both markets, particularly in Japan. The recent decline in Japanese stocks was partly attributed to ASML's disappointing earnings report, which highlighted a weak recovery in the semiconductor market outside the AI sector. This news affected semiconductor shares, leading to a significant drop in the Nikkei 225 index.

In the US, the semiconductor industry is also a major player, with companies like Nvidia experiencing significant fluctuations. However, the impact on the broader US market has been more mixed, with some tech stocks rebounding after initial drops.

3. Economic Indicators and Performance

Economic indicators such as GDP and retail sales have different implications for each market. Japan's GDP grew 3.1% year-on-year for the three months ending in June 2024, supported by consumption and wage growth. This strong economic data helped the Japanese stock market recover from earlier losses. In contrast, the US has seen mixed economic indicators, with some sectors performing better than others. For example, the S&P 500 has been influenced by tech-driven drops, while other sectors like consumer goods have shown resilience.

4. Market Volatility and Carry Trade

Market volatility has been a significant factor in both markets, particularly in Japan. The so-called yen carry trade, where investors borrow in low-interest yen to invest in higher-interest assets, has been a major contributor to market fluctuations. When the central bank of Japan raised interest rates, this carry trade unwound, leading to a sharp decline in the Japanese stock market. However, the market later recovered due to strong economic data and investor confidence.

5. Corporate Governance and Earnings

Corporate governance standards have improved in Japan, particularly for value companies, which have outperformed growth companies over the past year. The Topix, Japan's broader stock market index, has seen its earnings-per-share rise due to companies passing on higher input costs to consumers and the yen's strength waning. This improvement in corporate governance has contributed to the growth of value companies, which are expected to continue their upward trend.

Conclusion

The Japanese and US stock markets exhibit significant differences influenced by various economic factors. From interest rates and currency fluctuations to semiconductor industry performance and corporate governance standards, each market responds uniquely to global economic conditions.