Overview

The term “Black Monday” evokes memories of two significant events in the history of Japan’s Nikkei stock index. One was in 1987 and the other recently in 2024. While both events were seen as severe market crashes, their causes and their broader economic contexts were different. In analysing the two events, we can learn valuable lessons about market dynamics and the affected global economic landscape.

The Black Monday Crash of 1987

On October 19, 1987, global stock markets experienced one of the most catastrophic crashes in financial history, known as Black Monday. The Dow Jones Industrial Average (DJIA) in the United States plummeted 22.6% in a single day, while Japan’s Nikkei 225 index dropped about 15%. A combination of factors triggered the 1987 crash, including overvaluation of stocks, computerised trading, and fears of rising interest rates.

In Japan, the crash was particularly severe. It came at a time when the country was in the midst of an economic bubble. Asset prices, especially in real estate and stocks, were skyrocketing. The sudden drop in stock prices was a wake-up call, highlighting the fragility of the market. While the immediate impact was severe, with significant losses for investors, the global economy eventually stabilised. Central banks, including the Bank of Japan (BoJ), provided liquidity to markets to prevent a deeper recession. As a result, the markets recovered relatively quickly.

However, the 1987 crash foreshadowed the bursting of Japan’s economic bubble in the early 1990s. This led to the “Lost Decade,” a period of prolonged economic stagnation. The crash also exposed the vulnerabilities in financial markets, particularly the dangers of automated trading systems that could amplify losses.

The Black Monday Crash of 2024

Fast forward to August 5, 2024, and Japan’s Nikkei 225 experienced another Black Monday, its worst day since 1987. The Nikkei plunged 12.4%, wiping out all the gains made earlier in the year and sending shockwaves across global markets. Unlike in 1987, a single decision precipitated this crash: a modest interest rate hike from the Bank of Japan.

The BoJ’s decision to raise its benchmark interest rate by 0.25 percentage points was unexpected. For years, the BoJ had maintained ultra-low interest rates, aiming to stimulate economic growth and combat deflation. The move was intended to stabilise the yen, which had been weakening rapidly due to the widening interest rate differential between Japan and the United States. However, this slight increase had an outsized impact on the market.

The timing of the rate hike was critical. The global economy was already under strain, with fears of a U.S. recession growing. The BoJ’s decision to raise rates diverged sharply from the U.S. Federal Reserve’s approach, which had been signalling potential rate cuts to counteract economic slowdown. This divergence created confusion and uncertainty among investors, leading to a mass sell-off of Japanese equities.

The stronger yen, resulting from the rate hike, further compounded the problem. Japan’s economy is heavily reliant on exports, and a stronger yen makes Japanese goods more expensive in foreign markets, reducing demand. Investors, particularly those in export-oriented sectors, reacted swiftly, selling off stocks in anticipation of declining profits.

The 2024 crash underscored the interconnectedness of global markets. As Japan’s market tumbled, other Asian markets followed suit, with significant losses in South Korea and Taiwan. The U.S. markets also reacted negatively, with the Dow Jones Industrial Average plunging over 1,000 points, and the NASDAQ and S&P 500 suffering substantial losses.

Comparing the Crashes

While different factors triggered the 1987 and 2024 crashes, they share common themes of market fragility and the global ripple effects of financial shocks. The 1987 crash was more of a systemic failure, exacerbated by the novelty and untested nature of computerised trading systems. In contrast, a policy decision triggered the 2024 crash that, while seemingly small, had significant implications due to the context in which it was made.

The 1987 crash highlighted the risks of market overvaluation, and the dangers of automated trading strategies, exacerbating a market downturn. The 2024 crash, on the other hand, showcased the delicate balance central banks must maintain in an interconnected economy. Prior to the rate hike, while there were concerns about the weakening yen and rising inflationary pressures, economic indicators did not suggest an immediate need for tighter monetary policy. A modest interest rate hike in Japan had far-reaching consequences, not only for Japan but for global financial markets.

Conclusion

The Black Monday crashes of 1987 and 2024 in Japan serve as stark reminders of the volatility and unpredictability of global financial markets. While the causes of each crash differed, the effects were similarly devastating, both in terms of immediate financial losses and longer-term economic consequences. The 2024 crash, in particular, highlights the challenges central banks face in navigating complex economic landscapes and the potential for even small policy changes to trigger significant market disruptions. As global markets become increasingly interconnected, the lessons from these events remain ever relevant, emphasising the need for careful consideration of both domestic and international economic factors in policy decisions.