Nikkei Falls to ¥62,210 as Middle East Tensions Lift Oil

The Nikkei 225 closed at ¥62,210 on Friday, its lowest level since May 22 and about 8.4% below this year’s high. The index has declined from a June peak of ¥68,797 to the recent low.

With U.S. strikes and Iranian retaliatory actions that targeted U.S. interests in Kuwait and Bahrain, Brent crude rose above $94.30 a barrel and West Texas Intermediate traded near $91. Traders pointed to falling global crude inventories and a drawdown in U.S. Strategic Petroleum Reserves to multi-decade lows as factors tightening supply.

Japanese bond yields moved higher alongside the oil rally. The 10-year government bond yield reached about 2.68% and the two-year yield rose to roughly 1.41%. Those moves increased market pricing for a Bank of Japan rate increase at the central bank’s next policy meeting.

The equity selloff in Tokyo was broad. Heavy industrial and technology stocks led declines, with Kawasaki Heavy Industries, Sumitomo Electric Industries, Sumitomo Pharmaceutical, TDK Corporation and Mitsubishi Electric among the largest laggards. The index remained slightly above its 50-day exponential moving average and touched a major pivot on the Murrey Math Lines indicator. Technical analysts identified ¥60,000 as the next psychological support level if selling continues.

Global markets moved into risk-off mode during the week. U.S. equities fell sharply midweek, with the Dow Jones Industrial Average down more than 900 points and the S&P 500 lower by about 120 points on the same day. Hong Kong’s Hang Seng fell more than 1.4%, and South Korea’s Kospi slid to about 7,435 won from a year-to-date high near 8,935 won.

Because Japan imports most of its crude from the Gulf region, higher oil prices are expected to raise import costs and put upward pressure on consumer and producer prices in coming months. Analysts expect those price pressures to be a factor in the Bank of Japan’s policy considerations.

Persistent declines in global stockpiles and the reduction in U.S. strategic reserves, combined with renewed conflict in the Middle East, have added short-term uncertainty for energy markets and moved bond yields, currencies and equity valuations globally.