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Japanese stocks on Tuesday surged by their biggest intraday margin since October 2008, leading markets higher across Asia in a striking reversal of the previous day’s global sell-off.
Amid pre-market warnings from traders to expect extraordinary volatility, the broad Topix index rose more than 10 per cent as investors began bargain-hunting and the yen stabilised at about ¥144.607 after rising sharply in recent weeks.
The Topix rebound and the 9 per cent resurgence in the narrower, tech-heavy Nikkei 225 Average, came despite heavy overnight falls in US markets including a 3 per cent drop in the S&P 500.
Global markets have fallen in recent days amid fears the Federal Reserve has been too slow to respond to signs the US economy was weakening, and might be forced to play catch-up with a series of rapid interest rate cuts. Hardest hit, though, have been Japanese stocks which plunged more than 12 per cent on Monday, days after a surprise Bank of Japan rate rise.
But Tuesday’s rebound proved equally eye-catching. At one stage the Nikkei 225 Average was up 3,453 points — its biggest-ever intraday surge. The rush back into Japan’s equity market was so intense that trading in Nikkei and Topix futures contracts was automatically suspended during Tuesday morning session.
“A huge down day, then a huge up day. Nobody has experienced a market this crazy,” said Takeo Kamai, head of execution services at CLSA in Tokyo. “While the market has rebounded a lot, the bigger picture uncertainty remains — whether the Bank of Japan can now raise rates again this year, and whether the Fed will cut.”
The global sell-off has been exacerbated by the unwinding of the so-called yen carry trade, in which traders had taken advantage of Japan’s low interest rates to borrow in yen and buy riskier assets.
“Fundamentally, nothing significant has changed for the Japanese economy. It is the unwinding of the carry trade driving a lot of the momentum sells,” said Ray Sharma-Ong, head of multi-asset investment solutions for south-east Asia at Abrdn.
“We are finally seeing some stability in the currency market, with support for the yen at 145 to the dollar,” said Jason Lui, head of Apac equity and derivative strategy at BNP Paribas.
The rally was echoed across other Asian markets, with South Korea’s Kospi up 3 per cent in morning trading. The Taiwanese stock index, which had its worst sell-off in history on Monday, recovered 1 per cent while chipmaker TSMC rose 5.5 per cent.
“Korea and Taiwan are more impacted by the broader sentiment on AI and concerns around [artificial intelligence] capex,” Lui said, referring to concerns that tech companies have invested too heavily in AI capacity.
Atul Goyal, a Japan equities analyst at Jefferies, said that while fear was gripping markets, the fall in certain Japanese stocks on Monday had been “far too extreme”.
On Tuesday, a broad range of stocks in Tokyo soared, led by soy sauce maker Kikkoman, whose stock was up more than 17 per cent. Carmaker Honda rose more than 15 per cent and semiconductor equipment maker Tokyo Electron gained 15 per cent.
Financials, telecoms, industrials and parts of the tech sector were the main focus of buying in Japan on Tuesday after what Tomochika Kitaoka, strategist at Nomura, described as “something akin to a taper tantrum”.
The BoJ interest rate increase last week propelled the yen higher and triggered a three-day equities sell-off, culminating in Monday’s dramatic fall. By Monday’s close, the Topix had lost all its gains for the year after hitting an all-time high on July 11.
Traders and analysts struggled to explain the extremity of Monday’s sell-off, questioning why a hardening debate over the possibility of a US recession and a return of the dollar-yen rate to levels last seen in January had produced one of the country’s worst market collapses.
“There must be some forced or technical selling as the fundamentals did not change by 11-12 per cent in one weekend,” said Kiran Ganesh, multi-asset strategist at UBS. He added that a sharp sell-off presented a buying opportunity, but that the market would have to wait and see where the yen settles.
Others, including Nicholas Smith, Japan strategist at CLSA, pointed to the exaggerated impact of algorithmic trading programs, which may have specifically responded to the recent sharp upward move in the yen.
“It does look like they are correlated with the yen,” Smith said. “After all the excitement about the prospects of AI, it now looks like AI may have got us into this mess.”
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