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The broader Topix Index and the blue-chip Nikkei 225 pared some of their earlier losses but closed down 1.1% and 1.2% , respectively, after falling over 2% in morning trade. The yen was trading at around 147.70 to the dollar as of 3:30 p.m. in Tokyo, after surging more than 2% on Friday.
The latest US employment report showed the steepest downward revisions to jobs growth since the pandemic, with nonfarm payrolls being marked down by nearly 260,000 in May and June combined. The S&P 500 sank the most since May while the dollar snapped a six-day gain.
'With this kind of data, investors will be worrying not about the possibility of a recession, but that we might already be in one,' said Kazuhiro Sasaki, head of research at Phillip Securities Japan. 'That's being reflected in the weakening of the dollar and negative sentiment around stocks.'
Banking shares were major losers Monday, with the Topix's gauge of lenders down 3.2%, its biggest plunge since April 11. A murkier economic outlook in the US will likely dampen expectations for a near-term Bank of Japan rate hike, weighing on banks' shares, said Sasaki. Overnight index swaps are pricing in a 36% chance of a rate hike by October, down from 43% on Friday.
The drop in Japanese equities comes on the eve of the one-year anniversary of last August's market meltdown. The benchmark Topix plunged the most since 1987 on Aug. 5, 2024, following the Bank of Japan's unexpected interest rate hike, coupled with economic concerns in the US. Before Monday's fall, the gauge had recovered about 30% since.
'The rapid strengthening of the yen and weaker US data imply tougher times ahead for large cap exporters,' though domestic-demand oriented small caps may benefit from a stronger currency, said Jamie Halse, chief executive officer at Senjin Capital Pty. 'When the US sneezes the world catches a cold, so I would expect increased caution amongst equity investors.'
Japan is in the middle of an earnings season, with Sony Group Corp. and auto exporter Toyota Motor Corp. expected to report this week.
Games maker Nintendo Co. was a bright spot Monday, gaining 5.1% after its quarterly earnings showed strong sales of its Switch 2 console. The company's solid hardware sales, 'robust' game software pipeline and intellectual property expansion make its shares 'well-positioned to outperform,' wrote Jefferies analysts Atul Goyal and Shunki Nakamura in a note.
(A previous story corrected the spelling of company name in fourth paragraph.)
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