Rising Middle East Risks Shake Japanese Markets: Nikkei Closes Down 3.61%

Tokyo | EcoPulse24

Japanese financial markets came under significant pressure on Wednesday amid escalating geopolitical tensions in the Middle East and rising global energy prices, prompting investors to reduce exposure to risk assets in the region. This retreat occurred despite positive economic data showing improvements in private sector activity and consumer confidence reaching its highest level in several years.

The Nikkei 225 closed down 3.61% at 54,245 points, while the broader Topix index dropped 3.67% to 3,634 points. This marked the third consecutive session of losses for Japanese equities as a broad sell-off hit most market sectors.

Asian markets broadly faced headwinds after military operations expanded to include Israeli strikes in Lebanon and intensified Iranian missile and drone attacks against several countries in the region. These developments heightened investor fears over the impact of war on global energy prices, inflation, and interest rate outlooks.

Japanese stocks were particularly affected by rising oil prices, given the country's heavy reliance on energy imports. Global market declines further pressured local equities.

Technology and industrial companies led the downturn, with Fujikura shares down 7.2%, JX Advanced Metals falling 9.3%, SoftBank Group down 7.2%, Sumitomo Mitsui dropping 6.5%, and Toyota Motor losing 4.9%.

In currency markets, the yen faced additional pressure, hovering near 157.6 yen per US dollar, as safe-haven flows supported the greenback. Expectations that US interest rate cuts will be delayed also bolstered the dollar against major currencies.

Finance Minister Satsuki Katayama indicated that currency intervention remains an option to support the yen if volatility persists, emphasizing that authorities are monitoring currency moves "with a strong sense of urgency" and are coordinating with the US.

In the bond market, the yield on 10-year Japanese government bonds fell by about 5 basis points to 2.1%, reflecting increased demand for safe assets amid global market uncertainty.

Investors also reassessed their expectations for Bank of Japan policy in light of new economic risks. BoJ Governor Kazuo Ueda warned that Middle East conflict could significantly impact the Japanese economy, suggesting the central bank may keep rates unchanged for a longer period.

Meanwhile, economic data showed continued strength in Japan's private sector. The composite Purchasing Managers’ Index (PMI) rose to 53.9 in February 2026 from 53.1 in January, marking the fastest pace of expansion since May 2023.

The services PMI climbed to 53.8, its highest in 21 months, supported by increased new orders and robust domestic activity. New orders grew at the fastest rate in 33 months, while new export orders surged at an eight-year high due to improved global demand for Japanese industrial products.

Labor market data indicated ongoing hiring, albeit at a slightly slower pace due to labor shortages and high staff turnover. Companies also faced rising input costs, leading to the fastest increase in service sector selling prices since 2014 as firms sought to offset cost pressures.

On the domestic demand front, Japan’s consumer confidence index rose to 40 in February from 37.9 in January, beating market expectations of 38.2 and reaching its highest level since April 2019. All index components improved, with living conditions, income expectations, employment outlook, and durable goods purchase intentions all registering gains.

EcoPulse24 Analysis:
Recent developments in Japan highlight a divergence between strong domestic economic indicators and the impact of external shocks on financial markets. While the Japanese economy shows signs of expansion and improving consumer sentiment, financial markets remain highly sensitive to geopolitical risks and rising energy prices. The simultaneous decline in stocks and the yen indicates that investors are currently more focused on global risks than local fundamentals, reflecting Japan's deep integration with global energy and trade markets.