Nikkei Average Drops Over 1,400 Points in Two Days Amid Worsening US-China Relations and Falling Real Wages

Major Drop Continues: Nikkei Falls Over 1,400 Points in Two Days

In the Tokyo stock market, the Nikkei 225 index closed lower for the second straight day, dropping 844 points to finish at 51,117. The total decline over the past two days has hit about 1,400 points, sparking a sharp rise in caution among investors. [1][3]

Following declines in U.S. markets overnight, selling pressure started early in the morning, pushing the index quickly toward the key psychological level of around 51,500. The market struggled to recover and remained weak throughout the trading session. [1][2]

Worsening US-China Relations Raise Concerns About Japan’s Economy

Market watchers see the deterioration in Japan-China relations as a major factor behind the recent sell-off. The Chinese government announced tighter export controls on dual-use (military and civilian) items to Japan and also revealed an anti-dumping investigation into Japanese-made specialty gases used in semiconductors, fueling fears. [3]

This has led to worries that not only inbound tourism-related sectors but also manufacturing industries could be impacted. Many believe that economic pressure from China on Japan is likely to persist long-term, making Chinese-related stocks less attractive for now. [1][3]

Major Stocks Also Hit: Profit Taking on Cyclical and Sensitive Sectors

Overall, profit-taking has been dominant, especially among cyclical stocks that have driven the recent rally. Shares of companies with strong ties to China, like Shin-Etsu Chemical and Sumitomo Forestry, were sold off. Additionally, consumer and auto giants like ABC-Mart, Aeon, and Toyota Motor saw notable declines. [3]

Mainstream stocks such as Sumitomo Mitsui Financial Group, Nintendo, and Fanuc also weakened, leading to more decliners than advancers on the Tokyo Stock Exchange’s Prime Market. Meanwhile, the Tokyo Stock Exchange Growth Index (TSE Growth 250) edged slightly higher, indicating a shift in investor focus from large caps to small- and mid-cap growth stocks. [3]

Real Wages Decline for 11 Consecutive Months, Putting Pressure on Households

On the macroeconomic front, recent data shows that real wages in Japan have fallen for the 11th straight month. This ongoing decline highlights the gap between stock market gains and household purchasing power, as inflation outpaces wage growth. [2]

While the stock market remains near record highs, wages and consumer spending lack momentum, emphasizing the disconnect between stock prices and everyday life. Some analysts warn that if stock gains pause, these negative factors could become more prominent in investor sentiment. [2]

US Employment Data and Fed Rate Cut Expectations

International factors include recent U.S. employment reports indicating a gradual softening of the labor market. However, the data hasn't deviated enough from recent trends to significantly alter expectations of additional rate cuts by the Federal Reserve. [1][2]

The tech-heavy Nasdaq Composite has risen slightly for three consecutive days, showing that the U.S. market isn’t in full risk-off mode. Still, the combination of a pause in U.S. stocks and ongoing geopolitical and trade risks in Japan has made investors more cautious in Tokyo. [1]

Looking Ahead: US-China Tensions and Japan’s Economic Outlook

Market focus is shifting toward how escalating trade tensions between the U.S. and China might impact Japanese companies. Stricter controls on semiconductors and materials could disrupt supply chains and affect corporate earnings and investment plans. [3]

At the same time, domestic factors like wage growth, inflation, and consumer spending remain critical. With risk aversion rising, experts say this is a time for careful stock selection and thorough information analysis to navigate the uncertain environment. [1][2]