Oil at $108, War in the Middle East, and a Crumbling Nikkei 225 — What Comes Next?

The first bell on Monday morning in Tokyo felt different. Before most traders had finished their coffee, the numbers were already moving in the wrong direction, and by the time the session got going, it was obvious that this would not be a day that anyone would quietly forget. Japan’s oldest and most closely followed stock index, the Nikkei 225, closed down more than three percent, losing about 1,487 points in a single session and ending up close to 51,716. The decline has been interesting to observe for an index that flirted with record highs above 59,000 for a large portion of 2024.
It was easy to locate the immediate trigger. As tensions between Iran and the United States continue to escalate in ways that markets are finding difficult to appropriately price, Brent crude has risen from $107 to $109 per barrel. Nearly all of Japan’s oil is imported. It’s a structural vulnerability that has been ingrained in the nation’s economic reality for decades, but when energy prices rise so quickly, it becomes impossible to ignore the exposure. With its current value of 159 to the dollar, the yen provides minimal protection. Some investors might have hoped that the conflict would remain under control. Hope appears to be waning, according to the Monday session.

The uneven distribution of the selling across sectors is difficult to ignore. Some of the biggest losses went to automakers: Mazda fell more than seven percent, and Mitsubishi Motors fell almost eight percent. SoftBank Group and Taiyo Yuden were not far behind. These are names that anchor portfolios across institutional desks in Tokyo, London, and New York, not struggling fringe companies. Beyond the numbers, there is a symbolic significance to witnessing SoftBank, Masayoshi Son’s global bet on technology, fall more than six percent in a single session.
Traders have a feeling that something more intricate is going on underneath the surface. The fact that the yield on Japan’s benchmark government bonds recently reached a 27-year high merits more attention than it currently receives. That kind of movement in bond yields puts pressure on the entire system, including banks, pension funds, and debt-carrying corporations. As a sort of economic life support, the Bank of Japan kept rates close to zero for many years. This moment is exceptionally delicate because of the slow unwind of that posture. It is uncomfortable to have declining stocks and rising yields at the same time.
The situation in Asia as a whole wasn’t much better. The Kospi in South Korea dropped by almost 3%. The Hang Seng in Hong Kong fell nearly one percent. In fact, mainland China persevered thanks to some surprisingly strong industrial profit data, which seemed almost out of place considering everything else going on in the region. How long that resilience lasts if oil prices continue to rise and global demand declines is still up in the air.
The Nikkei’s current state also indicates a change in the way international investors view Japan as an asset class. Japan dominated trade for a large portion of 2023 and 2024, with record profits, corporate reform, a declining yen that increased exports, and a stock market that had been devalued for years beginning to rise. Money from abroad came in. For a market that had stagnated for the better part of three decades, the atmosphere was almost enthusiastic. In early March alone, foreign investors sold about 745 billion yen worth of Japanese stocks. That’s a sizable figure, indicating that the zeal has significantly subsided.
It’s still unclear if this is the start of a longer-term correction or a temporary one brought on by a particular geopolitical shock. It will affect the U.S. non-farm payrolls report, which is due on Friday. So will any changes that occur in the Iranian situation in the days ahead. There is a situation in which a diplomatic signal or ceasefire causes oil to retreat and markets to start breathing again. Another possibility is that it doesn’t, in which case the pressure increases through April.
The global financial crisis, the 2011 earthquake and tsunami, and the 2020 pandemic shock are just a few of the more severe storms that the Nikkei 225 has experienced. It eventually recovered each time, frequently with greater vigor than most anticipated. However, the short-term course appears genuinely uncertain as we watch this particular Monday unfold, with declining stocks, rising yields, pricey oil, and no clear resolution to the conflict driving it all. That’s a more difficult emotion for investors who benefited from Japan’s recent rally than the data alone would indicate.