Japan stocks fall as US-Iran strikes lift oil, bond yields

Japanese equities plunged on Wednesday as retaliatory US strikes on Iran sent oil prices soaring, raising apprehensions of a potential economic downturn, while surging bond yields pressured growth-oriented stocks. The Nikkei 225 Index slipped 2.95%, closing at 64,254.56, following a 2.37% decline in the broader Topix, bringing it close to ending a nine-day winning streak.

"The market suffered a broad sell-off today as investors braced for the fallout from the recent spike in oil prices," commented Daisuke Hashizume, a senior strategist at Daiwa Securities. Oil prices surged nearly 1% in early trading on Wednesday, continuing a previous day’s rise, driven by heightened concerns over a supply disruption following the US-Iran exchanges of strikes, dampening expectations of an imminent de-escalation in the Middle East.

Shares in technology companies, such as SoftBank Group, which fell 6.23%, and chip manufacturers Tokyo Electron and Advantest, which dropped 2.82% and 4% respectively, suffered the most. The upward trajectory of global bond yields also dragged down growth stocks, including chip-related firms, according to Hashizume. "While rising bond yields typically signal a strong economy, the recent spike in yields does not appear to be driven by healthy economic sentiment but rather by concerns about fiscal risks," he noted.

Japan's 10-year government bond yield climbed to a high of 3.01% on Wednesday, the highest level since September 1996, while the two-year bond yield reached 1.83%, the highest since April 1995, as investors anticipated more frequent Bank of Japan interest rate hikes. Toyota Motor and Honda Motor both declined by 2.5% and 2.39% respectively, dragging the Topix down.

Financial sector stocks, which typically benefit from higher yields, also underperformed, with Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group falling 0.8% each. Drug manufacturers, on the other hand, outperformed, with Sumitomo Pharma and Shionogi & Co rising by 1.48% and 0.92% respectively, marking the largest percentage gains among the Nikkei 225 Index's stocks.

Of the over 1,300 companies trading on the Tokyo Stock Exchange's Prime Market, 93% fell, 5% rose, and 1% remained unchanged.