Japan's benchmark Nikkei 225 index concluded Tuesday's trading session down 1.7%, settling at 65,269.33 points, with notable weakness spreading across the electronics and automotive sectors.
The market decline unfolded despite data showing Japan's second-quarter economic growth came in stronger than the initial reading, providing further justification for the Bank of Japan's anticipated rate hike next week. According to a Cabinet Office report released Tuesday, the nation's GDP expanded at an annualized pace of 1.4%, surpassing the preliminary figure of 1.1% but still trailing the median economist forecast of 1.8%.
After incorporating newly available data, capital expenditure by businesses emerged as the primary driver behind the upward revision; the metric contracted by 0.9% quarter-on-quarter, an improvement from the previously reported 1.2% decline. This fresh set of figures lends weight to the central bank's assessment that the economy is broadly aligning with its outlook, strengthening the case for a rate adjustment at the upcoming September 18 policy meeting. Swap market pricing indicates that investors have fully priced in a rate increase at that gathering.
Supporting the case for a September move, Japan's nominal wages posted their most significant increase in nearly three decades, propelled by healthy corporate earnings and a tight labor market. Government data released Tuesday revealed that July nominal wages climbed 4.7% year-on-year, accelerating from June's revised 4.0% figure. This marks the largest gain since 1997 and comfortably exceeds the 3.8% anticipated by economists. Notably, wage growth has now remained above the 3% threshold for six consecutive months, the longest such stretch in 34 years.
During Tuesday's Asian trading session, the yen strengthened against the U.S. dollar, hitting a six-month high and surpassing levels seen at the end of July when American and Japanese authorities conducted coordinated intervention to curb the currency's weakness. Nevertheless, investors remained wary of potential additional intervention measures following Finance Minister Satsuki Katayama's statement that Japan would continue collaborating with the United States to ensure market stability.
"We will maintain close communication with the U.S. Treasury to preserve orderly conditions in the foreign exchange market," Katayama said during her Tuesday press briefing. "Our policy stance has not changed in any way since our joint forex intervention with the United States," she added, referring to the historic coordinated action taken to boost the yen.
Demand at Japan's five-year government bond auction appeared somewhat tepid as investors exercised caution ahead of the central bank's meeting this month. The bid-to-cover ratio came in at 3.42 on Tuesday, down from 4.15 at the previous sale and slightly below the 12-month average of 3.44. Another indication of softened demand was the tail—the difference between the average and highest accepted prices—which widened to 0.04, up from 0.02 in the prior auction. Japanese government bond futures experienced a brief dip following the release of the auction results, as yields in the bond market had previously surged on growing investor bets that the central bank would raise rates in September.