Japanese stocks in bear market as banks slump on tariff jitters

Japanese stocks sank on Friday to their lowest since last August, marking their sharpest weekly drop in five years, as fears of a global recession in the wake of US President Donald Trump's sweeping tariffs gripped markets.

The Nikkei average closed down 2.75%, registering a 9% drop for the week, its steepest weekly decline since March 2020. The index also hit its lowest since early August during the session.

The index is down 20% from its peak in July, meaning it is in bear market territory per some market definitions.

The brutal selloff came after Trump announced on Wednesday Washington's steepest trade barriers in more than 100 years, sending investors scrambling for safe-haven assets, including the yen , which added further pressure on Japanese stocks.

The rout was led by banking stocks as the spectre of tariffs and their potential impact on economic growth stoked speculation that the Bank of Japan may need to delay rising interest rates.

The banking index fell over 8% on Friday, recording a 20% decline for the week, its worst weekly performance on record, according to LSEG data.

The broader Topix closed down 3.3% and clocked a 10% drop for the week, its biggest weekly decline since March 2020.

Japanese bank shares recently gained popularity among investors betting on rising BOJ rates.

All but three of the Tokyo Stock Exchange's 33 industry sub-indexes dropped on Friday, with the banking index down 11%, making it the worst performer and triggering a circuit breaker.

The banking index was on track for a decline of more than 20% this week, its worst weekly performance on record. Shares of Mitsubishi UFJ Financial Group, one of Japan's biggest banking groups, fell 11.6%, their sharpest one-day drop since August 5.

Markets around the world are still reeling after the US imposed the highest trade barriers in more than a century.

"There was quite a bit of froth in this market going into this Trump tariff announcement," said Kei Okamura, a portfolio manager at Neuberger Berman in Tokyo.

Banks had been doing well, and it appeared hedge funds had big exposure to the sector, hence the volatility, he said.

"The Trump tariff announcement is obviously creating uncertainties about the outlook for the currency because of what's happening in terms of the discussions within the BOJ."

"With that uncertainty about the potential for how many more rate hikes we can see this year, that's why we're seeing this reversal not just for JGB yields, but also in terms of the (banking) sector," Okamura said.

BOJ Governor Kazuo Ueda said the central bank would scrutinise the impact of US tariffs on the country's economy when setting monetary policy, warning the higher levies will likely weigh on global and domestic economic growth.

Wall Street benchmarks slumped on Thursday, ending with the largest single-day losses in years. S&P 500 companies lost a combined $2.4 trillion in stock market value.

Takamasa Ikeda, a senior portfolio manager at GCI Asset Management, said the Nikkei has "double headwind – the tariff and the stronger yen" and could fall to as low as 32,000 this month.