Impact of Interest Rate Hikes on Stock Markets: A Historical Perspective

As the United States and Japan prepare for simultaneous interest rate hikes, market attention is focused on the potential impact on global capital markets. These rate increases are expected to influence the domestic capital market through various channels. While interest rate hikes are typically viewed as negative for stock markets, historical data suggests that the correlation of 'interest rate hike = stock market decline' does not always hold true.

According to the financial investment industry on September 16, the Federal Reserve and the Bank of Japan are set to announce interest rate increases on September 17 and 18. Both countries are likely to raise rates by 25 basis points (1 basis point = 0.01 percentage points). Notably, many analysts predict that the Bank of Japan will continue to raise rates through the second quarter of next year. These rate hikes are expected to have a significant impact on the South Korean capital market.

What has been the effect of past U.S. and Japanese interest rate hikes on stock markets? The impact has varied significantly depending on the context of the U.S. rate hikes. An analysis by Shin Young Securities of 26 instances of U.S. policy rate increases since 1971 found that the S&P 500 index rose in 17 of those cases. In the 13 instances categorized as 'growth-driven' rate hikes, the S&P 500 increased 12 times, with an average gain of 10.7%. Conversely, in the 13 'inflation-fighting' instances, the index fell eight times, averaging a decline of 1.1%.

The South Korean stock market has shown similar trends. During the Federal Reserve's 11 rate hikes totaling 525 basis points from 2022 to 2023, the KOSPI index experienced significant adjustments, dropping by about 25% in 2022. In contrast, from 2004 to 2006, when the Fed raised rates 17 times for a total of 425 basis points, the KOSPI actually rose by 60.7%, supported by increased exports due to China's growth, domestic recovery, and inflows into equity funds.

The impact of Japan's rate hikes has been somewhat limited compared to the U.S. The Bank of Japan (BOJ) ended its negative interest rate policy in March 2024 and raised rates five times by June of this year. The only significant simultaneous drop in the South Korean and Japanese stock markets occurred after the BOJ's rate hike in July 2024.

On the day the BOJ raised its policy rate to 0.25%, the Nikkei 225 and KOSPI rose by 1.49% and 1.19%, respectively. However, in the following trading days, the Nikkei 225 plummeted by 2.49%, 5.81%, and 12.40%, while the KOSPI initially rose by 0.25% before falling by 3.65% and 8.77%. The shock was exacerbated by a stronger yen and concerns over unwinding yen carry trades. In contrast, the other four instances of rate normalization and increases did not see such drastic declines.

Market analysts believe that the potential for further tightening is more critical than the rate hikes themselves. Kim Min-kyu, a researcher at KB Securities, stated, "The stock market has already factored in much of the uncertainty surrounding interest rates since the outbreak of the U.S.-Iran conflict. Even if rate hikes occur, we expect the short-term impact to be minimal." He added, "If the rate hikes lead to a temporary stabilization of long-term rates, it could be beneficial for the stock market. However, it is essential to determine whether the rate hikes represent a long-term trend."