Why Japanese stocks just had their worst day in 4 years

• Japan's Nikkei stock average fell 5.8% today, its biggest single-day decline since 2020.
• The slump was partially fueled by a sharp decline in the US economic outlook.
• The Japanese government raised rates on Wednesday, breaking from its historically dovish stance.

Japan's stocks took a hit on Friday, fueled by economic concerns in the US and the Bank of Japan's interest-rate hike earlier this week.

The Nikkei Stock Average closed at 35,909.70, down 5.8%, marking its largest daily decline since March 2020 after hitting record highs earlier this month.

The drop comes just two days after the Bank of Japan raised interest rates in an effort to boost the yen's value amidst higher inflation. The BoJ raised rates from a range of 0% to 0.1% to a benchmark 0.25%.

The decision was a surprising one, given that Japanese officials typically stray away from such hawkish actions. The bank raised interest rates for the first time in 17 years back in March, ending its negative interest-rate policy.

Japan's semiconductor companies drove the index's decline, with Tokyo Electron dropping 12% after Intel missed earnings estimates and announced cost-cutting measures that plan to save $10 billion next year.

Friday's slump was also fueled by signs of a cooling US economy. US stock indexes have tanked across the board over the past two days due to a combination of discouraging economic data points, including rising unemployment and slowing manufacturing and construction.

US unemployment soared past estimates to the highest level seen in nearly a year, while the ISM manufacturing index dropped to an eight-month low.

BoJ Governor Kazuo Ueda said in a press conference Wednesday that if Japan's economy moves according to the bank's projections, it will continue to raise interest rates.

Bank of America analysts say they expect the BoJ's next hike in January.

"Looking ahead, the market's terminal rate expectations may rise somewhat and bring the timing of rate hikes forward," the analysts said in a Thursday note, adding, "While acknowledging the possibility of an earlier move, our economist still expects the next rate hike to take place in January."

Others add that, as the market prices in the rate hikes, it will adjust accordingly.

"As the likely pace of interest rate hikes becomes clear via economic indicators going forward, we think share price discounting will diminish," analysts from JPMorgan said in a Thursday note.