On the morning of July 17, Japan’s stock market tumbled sharply; the Nikkei 225 index fell by more than 2,400 points, down over 3.60%, which is 10% lower than its June peak.

US stock index futures’ declines also kept widening; as of the time of writing, Nasdaq 100 futures were down 0.70%, Dow Jones futures were down 0.38%, and S&P 500 index futures were down 0.35%.

Japan stock market tumbles

After the market opened today, Japan’s stocks moved lower across the board. As of the time of writing, the Nikkei 225 index was down 2,457 points, a decline of 3.68%. For individual stocks, SoftBank Group and Tokyo Electron both fell by more than 7%. In addition, Kioxia plunged by more than 15%. A U.S. federal jury in Texas ruled on Thursday that Kioxia infringed a flash-memory-related patent held by Viasat Inc., and the company must pay $229 million in damages.

The overnight selloff in US chip stocks also weighed on Japan’s market. On Thursday, storage-chip concept stocks in the US market fell across the board. Among them, SK hynix ADR dropped 13.69%, SanDisk fell 12.63%, and Micron Technology declined 5.65%. Other chip stocks also slid sharply: the Philadelphia Semiconductor Index fell by more than 4%, Marvell Technology fell by more than 8%, and Intel, ARM, and Advanced Micro Devices all fell by more than 5%.

Resona Holdings strategist Hiroki Takei said that high-tech stocks are undergoing a pullback, and that recent movements in semiconductor stocks have diverged clearly from the broader market. Takei said the recent volatility in high-tech stocks appears to be driven more by supply-and-demand factors than by fundamentals; he also believes the Korean stock market has fallen sharply due to issues related to leveraged ETFs, and that financing buy-ins by Japan’s individual investors have increased significantly in recent weeks.

The Bank of Korea announced yesterday (July 16) that it would raise the benchmark interest rate from 2.50% to 2.75%. This was the first rate hike Korea has decided on in 3 years and 6 months, signaling that Korea is entering a period of monetary tightening.

Market analysts noted that the Bank of Korea’s rate hike raised borrowing costs for leveraged funds and accelerated their withdrawal. However, the rate hike is only one of the catalysts behind the sharp two-day drop in Korea’s stock market. With concerns over overvaluation and pressure to take profits, the negative combination of the Bank of Korea’s hawkish signals and concentrated selloffs in the semiconductor sector jointly triggered a deeper market adjustment.

Against the backdrop of wild surges and crashes in the stock market, the South Korean government significantly tightened regulation of leveraged single-stock ETFs. On July 16, South Korea’s financial regulatory authorities released regulatory measures targeting single-stock exchange-traded funds (ETFs).

First, raise the entry thresholds for leveraged ETFs on individual stocks. Previously, the margin required for new subscriptions or additional purchases was 10 million won; this time, it will be raised to 30 million won. The required margin currently includes not only cash, but also stocks, traditional ETFs, exchange-traded funds, and bonds valued at up to 70% of market price. Going forward, however, only cash will be accepted as margin.