Asia-Pacific stock markets experienced the so-called "Black Monday" on Monday, with Japanese and Korean stock markets opening sharply lower, and Japan's Topix Index even triggering the circuit breaker mechanism several times. At the same time, U.S. stocks also closed down across the board last Friday. So, what is the real reason for this round of plunge?

In fact, this is related to Japan's ending of its eight-year negative interest rate policy and its first interest rate hike since 2017.

Japan's negative interest rate policy is really weird, which can be roughly understood as "borrowing 100 yuan from the bank this year, and only paying 99.9 yuan next year, and not paying any interest." This low-interest loan has prompted many Japanese people to borrow money to invest in overseas assets, resulting in a large number of carry transactions (Carry Trading). For a long time, a large number of international investors have used Japan's almost zero yen loans to convert them into US dollars to buy U.S. stocks and bonds, or deposit them in U.S. banks to earn interest rate differentials.

However, with the recent dovish stance of Federal Reserve Chairman Powell, the expectation of a U.S. interest rate cut has become clear, and U.S. technology stocks and chip stocks have begun to fall, and market expectations have changed. The US interest rate cut may lead to the depreciation of the US dollar, affecting import and export trade, especially the chip and technology stock sectors represented by TSMC.

As the market expects the Federal Reserve to cut interest rates, and the Bank of Japan announced an interest rate hike, the yen strengthened, and the arbitrage model that relied on the low interest rate yen in the past began to reverse. Investors sold their US stocks and US dollars in exchange for cash to repay their yen debts. In addition, the non-farm data released last Thursday showed that the employment population weakened and the unemployment rate increased, which may force the Federal Reserve to accelerate the pace of interest rate cuts.

The Fed's interest rate cut itself is usually regarded as a positive, but Japan's announcement of an interest rate hike at this time may suppress Japan's imports and exports. The United States is Japan's main trading partner, and Japan is the fourth largest importer of the United States. Therefore, the Bank of Japan's interest rate hike decision further amplified the market's panic about the Japanese stock market.

In the past two years, there has been a significant correlation between the rise of the Nikkei index and the depreciation of the yen against the US dollar. The depreciation of the yen helps Japanese companies' exports and improves the profitability of Japanese listed companies. However, with the adjustment of Japan's monetary policy, the yen's currency against the US dollar has turned from depreciation to appreciation, the competitiveness of Japanese multinational companies may decline, and Japanese stocks have lost the momentum to rise.