Japan’s Nikkei index slides from record high as BOJ pivot looms large

Investing.com-- Japan’s Nikkei 225 index reversed early gains and traded lower on Thursday as growing expectations of a Bank of Japan policy shift largely offset a positive lead-in from Wall Street.

The Nikkei 225 traded down 0.7%, after briefly hitting a record high of 40,499.0 points just after the open. The index had tread water for the past two sessions after blazing past the 40,000 level for the first time ever earlier this week.

While their recent run of record highs made Japanese stocks vulnerable to profit-taking, losses on Thursday were driven chiefly by growing conviction that the BOJ could begin hiking interest rates by as soon as late-March.

Losses in the Nikkei were broad-based, with technology stocks- which had largely driven the index's recent rally- seeing the biggest losses. A spike in the yen also pressured export-oriented stocks.

But Japan's biggest banks advanced on the prospect of higher interest rates. Shares of Mitsubishi UFJ (NYSE:MUFG) Financial Group Inc (TYO:8306)- the country’s biggest bank- rose 1.8%, while Resona Holdings, Inc. (TYO:8308) added 2.3%. 

The BOJ has signaled that wage growth is a key factor in its considerations for altering policy, given that wage growth is tied closely to the bank achieving its 2% inflation target.

Stronger-than-expected average cash earnings data for January furthered this notion, as did a major Japanese union winning big pay hikes for some of its members.

Additionally, BOJ board member Junko Nakagawa flagged steady progress towards the bank's 2% inflation target- echoing recent comments by other BOJ members.

While Japanese inflation fell sharply through 2023, it faced some resistance in recent months at the 2% level. Underlying inflation also remained sticky, even as consumer spending slowed sharply in recent months.

Higher wages are expected to boost consumption and in turn inflation, giving the BOJ more impetus to tighten policy. The BOJ has maintained interest rates at record lows since 2016, with any hikes marking its first rate increase since 2007.

The BOJ is now pegged to potentially hike interest rates and signal an end to its ultra-dovish policy during its March 19 meeting.