Financial Structure | Law & Economics | Financial modeling | Finance and Reality
[Spanish translated with A.I]. Regarding the fall of the Nikkei 225. The Nikkei 225 is the indicator of the Tokyo Stock Exchange and represents its major companies. On Monday, August 5, 2024, it fell by 12.40% compared to Friday’s close, accumulating a 17.49% drop since Thursday’s close. All 225 listed stocks declined in price. This caused some global contagion, with the S&P 500, which includes the 500 largest companies, falling by 3%, continuing a decline that started last week. Since the year's high on July 16, the S&P 500 has fallen by 8.49%, erasing half of the gains made on 2024. Why is this happening, and what are the causes? 1. During the mid-2010s, Japan implemented an economic policy known as "Abenomics". This policy is characterized by expansive monetary and fiscal measures to counteract the “deflation” or price index stability that had marked the country for decades. Japan has a debt-to-GDP ratio of 254.6x, nearly double that of the US (123.3x). It is the second highest in the world. 2. Despite post-pandemic inflation, Japan’s intervention rate has remained extremely low, while the US rate is 5.25 – 5.5%. Japan's rate only rose once from zero to the range of 0 – 0.1%. This rate differential allows borrowing in Japan at low-interest rates to purchase fixed or variable income assets in other countries, a practice known as carry-trade. Carry-trade creates a positive feedback loop. 3. According to Japan's statistics office, inflation reached 2.86% in the LTM. The Bank of Japan (BoJ) raised its reference rate to 0.25%. Additionally, the BoJ made “hawkish” statements. While still a near-zero real rate, it doubles the interest on any debt in Japan, leading to a strong yen appreciation. 4 As explained in the video in the comments, margin calls are crucial for hedge funds or leveraged stock funds. A leveraged fund buys stocks partly using debt. With 60% leverage, it could hold 2.5x more stocks per unit of added equity. Stock prices fluctuate while the initial debt remains. However, if it reaches or exceeds certain levels the bank might issue a margin call, requiring either debt prepayment or position liquidation. Leveraged positions amplify gains but also magnify losses. 5. The US market has fallen sharply in recent weeks due to weak results from some major companies and a correction in NVIDIA’s boom (-20.88% vs ATH by Friday), despite representing about 5% of the S&P 500, or Tesla with a 50% drop in net profit in the first half of 2024 compared to 2023. The publication of a 4.3% unemployment rate in the US, while the market expected 4.1%, added to the downturn. 7. For shareholders with debt positions in yen, there’s both an increase in real liabilities and a reduction in real assets if one multiplies the S&P 500 by the yen, the year’s peak was on July 10, with the yen peaking on July 3 and the S&P 500 on July 16. Since July 10, the S&P 500 in yen terms has dropped 17.93%. Depending on leverage, losses could reach 50% with 64% leverage.