Japan’s Nikkei leads gains over 2%

The Nikkei stock index briefly gained over 2 percent Friday morning, led by chip-related technology stocks tracking advances by their U.S. counterparts on hopes the world's largest economy can achieve a soft landing.

Japan's Nikkei share average jumped more than 2%

Japan's Nikkei share average surged over 2% in Friday morning trading, reflecting gains from Wall Street. Traders remained cautious ahead of the Bank of Japan's policy decision later in the day. As of 0156 GMT, the tech-heavy index rose 2.05% to 37,915.87, with chip-sector stocks leading the charge; notably, Tokyo Electron saw a significant 5.8% increase.

At 10 a.m., the 225-issue Nikkei Stock Average was up 689.96 points, or 1.86 percent, from Thursday at 37,845.29. The broader Topix index rose 35.05 points, or 1.34 percent, to 2,651.92.

This surge reflects broader economic trends as investor expectations pivot on US Federal Reserve moves. With slower than anticipated rate cuts in the US, currency fluctuations impact global markets. Japan's reaction showcases how interconnected and sensitive international markets are to monetary policy signals from major economies.

A weaker yen provided support to Japanese equities

A weaker yen boosts the competitiveness of Japanese exporters by making their products cheaper abroad. Automakers, which had previously struggled due to a stronger yen, seized the opportunity. Toyota's and Honda's rallies are signals of revitalized investor confidence in Japan’s auto sector.

In early July, the yen fell to a 38-year low against the dollar but has since rebounded, appreciating over 12% as the gap between two-year U.S. and Japanese interest rates narrowed by about 130 basis points over the past 11 weeks.

Further gains seem likely if either a dovish stance from the Fed or a hawkish tone from the BOJ drives the yen below 140, potentially challenging last January's peak of 127.215 per dollar. This could also push the yen past corporate exchange rate assumptions for the fiscal year, prompting businesses to buy and boosting existing momentum. Meanwhile, Japanese stocks remain cautious, with the Nikkei down 1.7%.

Market outlook: focus on US rate cuts and Asian market developments

Markets are expected to look beyond the current numbers, focusing not just on the anticipated U.S. rate cut this week, but also on its implications and forward guidance. This will serve as a framework for interpreting upcoming economic data in the weeks and months ahead.

According to BlackRock's research division, the robust U.S. economy may result in rate cuts being less pronounced than the 250 basis points that traders have factored in for the next year.

In other news from Asia, Australia’s ASX 200 reached a new record high, while Chinese home appliance manufacturer Midea saw a 9.5% jump on its first day of trading in Hong Kong. Meanwhile, mainland Chinese markets were closed for a holiday.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.