Japanese shares made a strong comeback on Tuesday, recovering some of the historic losses from the previous day and driving a regional rally. The benchmark Nikkei 225 index surged 10%, while the broader Topix gained around 9%. In Asia, South Korea’s Kospi rebounded by 3.3% and Taiwan stocks climbed 3.4%.
Australia’s S&P/ASX 200 and China’s Shanghai Composite each rose by 0.4%, and Hong Kong’s Hang Seng Index was up 0.3%. All these indexes had experienced significant losses in the preceding session.
Neil Newman, head of strategy at Astris Advisory in Tokyo, noted, “The bounce in Japan is typical after a market crash. Fundamentals are solid, the economy is stable, and there’s no indication of abandoning Japanese equities.”
Despite the rebound, short-term market volatility persists, as analysts from UBS Chief Investment Office suggest that the US dollar has yet to stabilise against the Japanese yen. They cautioned that it might be premature to declare that the Japanese stock market has hit its bottom, with potential recovery likely tied to Japanese corporate earnings reports in October or even the US presidential election in November.
On Monday, the Nikkei 225 saw its largest one-day drop since October 1987, closing 12.4% lower and losing 4,451 points—a record decline. This steep plunge contributed to a global market sell-off, affecting major Asian, European, and US markets.
Wall Street faced significant declines with all three major indexes falling between 2.6% and 3.4% due to fears of a faster-than-expected slowdown in the US economy. However, futures for the S&P 500 and Nasdaq showed signs of recovery in the hours following the main trading session.
Global markets were shaken starting Friday by mounting recession fears in the US and the rapid unwinding of popular carry trades involving the yen. Analysts from Moody’s Analytics noted that much of the downturn reflects worries about a potential US recession.
The sell-off also affected AI-related tech stocks, which hit equity valuations across Taiwan and South Korea, regions that are major producers of high-end semiconductors used in AI applications.
Rising Yen
Japan’s stock market faced significant turbulence due to the yen’s rapid appreciation, which has eroded the export competitiveness of the country’s manufacturers. On Monday, the yen reached a seven-month high against the US dollar, climbing to around 143, before retreating to approximately 146 on Tuesday.
The yen’s rise followed a recent shift in the Bank of Japan’s (BOJ) monetary policy towards a more hawkish stance, prompting many investors to unwind their yen carry trades. This strategy, involving borrowing cheaply in yen and investing in higher-yielding assets abroad, was disrupted by the yen’s appreciation, leading to market upheaval, according to Stephen Innes, managing partner at SPI Asset Management.
Tokyo has become the focal point of this market disruption, with the effects of the carry trade unwinding intensifying the turbulence for traders and investors. The BOJ’s recent decision to raise interest rates for the second time this year and reduce bond buying plans has fueled expectations of further rate hikes to manage inflation.
“I think the initial panic over the BOJ’s decision has been absorbed, but concerns remain,” said Neil Newman. “The key issue now is whether the BOJ will implement another rate increase despite press criticism, which I believe they will, remaining steadfast in their policy.”
With over half of Japan’s production destined for international markets, the high costs of raw materials and energy, exacerbated by the yen’s weakness, are pressing concerns. This economic pressure might prompt the BOJ to support the yen further.
Japanese Prime Minister Fumio Kishida emphasised the importance of maintaining a balanced perspective on market conditions. He expressed optimism about the economy, highlighting a recent increase in inflation-adjusted real wages for the first time in over two years.
