TOKYO/HONG KONG -- Asian currencies were hit and stock markets were broadly lower on Thursday after the U.S. Federal Reserve indicated that it expected to make its first post-pandemic interest rate increase in 2023.
In Japan, the blue-chip Nikkei Stock Average at one point dropped over 400 points, or 1.4%, before trimming its losses to close down 0.9%. The broader Topix benchmark slipped 0.6% while the startup-concentrated Mothers index was hit the hardest, declining 1.7%.
The slide mirrors one on Wall Street that left the Dow Jones Industrial Average down 0.8% on Wednesday, following a policy meeting by the U.S. central bank.
The Fed raised its inflation expectations and brought forward the time frame on when it will hike interest rates, saying that a rate hike could come as early as in 2023. In March, the Fed had signaled that there would be no rate hike until at least 2024.
U.S. 10-year bond yields rose 8 basis points after the Fed signal, which in turn propelled the dollar higher against a basket of currencies. The dollar index logged its biggest rise in a year and was up 0.2%.
The Japanese yen weakened, at one point hitting a two-month low of 110.80 yen per dollar. Emerging market currencies from the South Korean won to Chinese yuan to the Indian rupee tumbled against the greenback.
In the Tokyo stock market, electronics and tech stocks declined sharply. Shares in SoftBank Group hit the lowest level in over five months while semiconductor related companies also bore the brunt with Advantest dropping 1.7% and Renesas Electronics down 1%. Startups with high valuations, like flea market app Mercari and e-commerce platform provider Base, also closed down lower.
South Korea's Kospi stock index declined 0.4% with shares in Samsung Electronics down 1% and SK Hynix dropping more than 2%.
Masahiro Ichikawa, chief market strategist at Mitsui Sumitomo DS Asset Management in Tokyo, said: "In March, seven members of the Federal Open Market Committee predicted a rate hike in 2023. This time the number jumped to 13 members, which came as a surprise for market participants."
While some investors were quick to dump stocks on Thursday, Ichikawa pointed out that a rate hike is "not a bad thing in the long term," as it means that the U.S. is confident about its economy.
The Hang Seng Index closed 0.4% higher, with declines at Ping An Insurance, Hong Kong Exchanges and Clearing, and China Mobile offset by gains for HSBC Holdings, insurer AIA -- which is seen as gaining from higher rates -- Geely Auto, electric vehicle manufacturer BYD and food delivery platform Meituan. The shares were bid up by mainland investors through the stock connect channel that links Hong Kong with Shanghai and Shenzhen exchanges.
China's CSI 300 index, which tracks the largest shares listed in Shanghai and Shenzen, climbed 0.4%.
"The stage is set for what I feel is a period of somewhat higher volatility as the narrative changes and traders adjust to a future reduction in liquidity conditions," said Chris Weston, head of research at Pepperstone in Melbourne. "[Fed Chairman Jerome] Powell et al will make it clear that any changes will be glacial and will be communicated well in advance, and there is no reason to believe we'll see a collapse in risk sentiment."