U.S. Rate Hike Jolts Tokyo Stock Market

Stock prices nose-dived in Tokyo on Wednesday in the year’s biggest fall on fears of higher interest rates following Tuesday’s rise in the U.S. discount rate, brokers said.

“It took New York by surprise and it certainly took people here by surprise,” said Paul Migliorato, a broker with Jardine Fleming Securities Ltd. “Currency is the biggest worry. If the yen weakens further, there is fear Japan will raise interest rates.”

The Nikkei 225-share index fell 615.49 points, or 2.18%, to 27,554.87. The fall surpassed the previous record 1988 drop of 513.09 points set July 19. It fell 82.76 points on Tuesday.

Volume was a moderate 700 million shares, compared to Tuesday’s 650 million shares. Losers led gainers by a margin of almost 7 to 1.

Mining shares were the only ones to advance.

In early trading this morning, share prices rebounded in a broad, bargain-hunting rally.

On Wednesday, the market fell all day on news that the Federal Reserve raised its discount rate to 6.5% from 6%.

The U.S. rate rise boosted the dollar on Tuesday and the currency held most of the advance in Asia on Wednesday. It closed at 134.92 Japanese yen here against 135.15 in New York and 133.58 here at the close on Tuesday.

Investors had been reassured by the recent stability in the yen-dollar rate, which had been trapped between 133 and 135 yen, but the dollar’s rise to a range of 134.75 to 135.20 yen in Tokyo awakened fears that the yen could fall further.

“If the dollar breaks through 140 yen, people will worry about imported inflation,” said Yozo Asai, a broker at Yamaichi Securities. “Everyone wants to wait and see what happens with the exchange rate,” he added.

Investors are awaiting next week’s release on U.S. June trade data for hints on the direction of the yen-dollar rate, brokers said. A lower-than-expected trade deficit could send the dollar higher.

Neither the Bank of Japan nor other major central banks have been seen selling dollars since the discount rate rise.

This worried investors, who fear that the Bank of Japan may defend the yen by raising domestic interest rates rather than through intervention, brokers said.

Japan has managed to keep its discount rate at a record low 2.5%. But the U.S. move and a general global upturn in rates might change this, brokers said.

Talk of a boost in the Japanese discount rate filtered into the afternoon market.

Investors were further unsettled when the Bank of Japan allowed increases in one- and two-month commercial bill rates, especially as yen bonds plunged on the news.

But others were reassured by statements from government officials that they saw no need to change Japan’s monetary policies.