August has proven to be a tumultuous month for global stock markets, with Japan's Nikkei 225 index plummeting by an unprecedented 12.4%, a record that has not been seen in decadesDelving into market trends since 1990 reveals that even during times of economic downturn in Japan, such a catastrophic drop was rareAnalyzing the factors behind the dramatic declines in both Japanese and South Korean markets brings to light complex economic dynamics, interest rates, and currency fluctuations that are reshaping the investment landscape.

To begin with, a new wave of monetary policy shifts has resulted in a reset of asset prices.

The contrasting monetary policies of the United States and Japan—one easing interest rates while the other raises them—have converged to create a ripple effect that has led to significant downturns across stock markets in Europe, the United States, and Asia-Pacific regionsThis unusual scenario may seem bewildering, yet its roots are grounded in straightforward economic principles.Dollar depreciation due to rate cuts in the U.S. and the appreciation of the yen simultaneously reset asset prices, thereby influencing worldwide economic trends.

The crashes in the Asia-Pacific stock markets can be attributed to a significant contraction of liquidityThe long-standing low interest rates provided by the yen have fueled liquidity in the regionHowever, with Japan's recent interest rate hikes and corresponding yen appreciation, liquidity has tightened, threatening to destabilize markets that had previously experienced dramatic increases

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This is akin to withdrawing a foundational support, leading to sharp declines in markets like Japan, South Korea, India, and Taiwan—regions that have seen substantial growth recently.

As an export-driven economy, Japan is highly sensitive to currency fluctuationsA weaker yen historically benefits exports, while a stronger yen poses significant threats to profitability for Japanese export companiesAs companies face shrinking margins, this, in turn, diminishes risk appetites and distorts investment behaviors.

In just 18 trading days, the value of the yen increased by 12%. Such a stark appreciation sparked substantial arbitrage opportunitiesConsequently, investors started unloading stocks to buy yen, expecting to profit from the currency appreciation before exchanging it back to dollars, leading to a compounding effect of stock market declines while intensifying yen strengthOne day, we even saw the yen strengthen by as much as 3%—indicative of the extreme market conditions.

Moreover, European and American stock markets are facing their own set of challenges.

The dollar's depreciation and the weakening of the dollar index mean that dollar-denominated assets are losing value, prompting a rush to sell off these assets and causing heavy losses in the U.S. and European markets.

In addition to these monetary adjustments, the trend of valuation regression typically follows periods of excessive market growth.

In recent years, stocks in the U.S., Europe, Japan, and India have soared to new historical heights, creating an atmosphere rife with market bubbles

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In this context of U.S. rate cuts and rising interest rates in Japan, riskier assets and bubble-prone investments are the first to undergo reevaluation as substantial capital begins to withdraw, subsequently exerting pressure on the market and initiating valuation corrections.

Furthermore, the market is reacting to fears surrounding economic recessions.

Recent U.S. non-farm payroll figures have failed to impress, showcasing a rising unemployment rate alongside the disheartening ISM manufacturing index, which dropped to 46.8—well below the anticipated consensus of 48.8. Such negative data compounds fears and jitteriness surrounding the prospects of an American recession, even prompting renowned investor Warren Buffett to reduce his stakes significantly, selling about 50% of his shares in Apple and pulling back from American banks, raising over $90 billion in liquid capital.

In addition to U.S. apprehensions, the recent yen appreciation raises questions regarding Japan's economic stability, with fears that liquidity reductions could lead to a downturn similar to that faced by the U.S.

With the shift in market sentiment towards prices reflecting regressions in American and Japanese economic forecasts, capital began to flow out of both markets, culminating in the steep declines across international stock exchanges.

By the time of writing, European stock markets opened significantly lower, while American markets are also expected to see a turbulent night ahead.

The impacts from the global drops may disrupt the short-term movements in the Chinese market, although it could also align with mid-term benefits as funds exited from other markets might seek refuge in the Chinese market.

As trends from the U.S., Europe, and Japan turn counterproductive, it is likely that surrounding markets have peaked temporarily

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