Japanese shares saw a significant rebound on Tuesday, recovering some of the losses from the previous day’s historic drop. The Nikkei 225 index rose by 10%, while the broader Topix gained about 9%. In other parts of Asia, South Korea’s Kospi climbed by 3.3%, and Taiwan stocks increased by 3.4%. However, Hong Kong’s Hang Seng Index, which closes later, dropped by 0.3%.
Monday’s trading session saw global markets plummet due to fears of a slowing US economy, rising Japanese interest rates, and declining tech stocks. Although European stocks initially recouped some losses on Tuesday, they later edged down. By 5.53 a.m. ET, the Stoxx 600 index was 0.3% lower, following a 2.2% loss the previous day, and London’s FTSE 100 was down by 0.3%.
US stock futures indicated a positive opening, with S&P 500 futures up 0.4% and Nasdaq futures up 0.3%. Neil Newman, head of strategy at Astris Advisory in Tokyo, explained that the rebound in Japan was typical following a market crash, noting that the economy was fundamentally sound and Japanese equities were not being abandoned.
Despite the rebound, short-term volatility is expected to persist. UBS Chief Investment Office analysts noted in a report that the US dollar had not yet stabilised against the Japanese yen, making it premature to conclude that the Japanese stock market had bottomed out. They suggested that any meaningful recovery might only occur after Japanese companies report first-half earnings in October or possibly after the US presidential election in November.
Monday’s session saw the Nikkei drop by 12.4%, marking its largest percentage one-day drop since October 1987 and its biggest point decline ever at 4,451. This led to a global market rout affecting major markets in Asia, Europe, and the US. Wall Street saw all three major indexes fall between 2.6% and 3.4%, driven by fears of a faster-than-expected slowdown in the US economy.
The market downturn also reflected concerns about a potential US recession and the rapid unwinding of yen carry trades, popular investment strategies involving borrowing yen to invest in higher-yielding assets. AI-related tech stocks were particularly affected, impacting equity valuations across Taiwan and South Korea.
Japan’s stock market was hit hard by the yen’s rapid appreciation, which weakened the export competitiveness of Japanese manufacturers. On Monday, the yen reached a seven-month high against the US dollar at around 143 before pulling back to 146 on Tuesday.
The yen’s surge was prompted by the Bank of Japan’s recent hawkish stance on monetary policy, leading investors to unwind yen carry trades. Stephen Innes, managing partner of SPI Asset Management, highlighted Tokyo as the epicentre of these trades, which intensified market turbulence.
The Bank of Japan raised interest rates for the second time this year on Wednesday and announced plans to reduce bond buying, with expectations of more rate hikes later this year to contain inflation. Neil Newman noted that despite concerns, the central bank is likely to proceed with further rate increases.
Japan’s Prime Minister Fumio Kishida emphasised the importance of making calm market judgements, expressing optimism for the economy. He cited the first rise in inflation-adjusted real wages in over two years as a positive indicator.
While Japanese shares have shown a robust rebound, ongoing market volatility and economic uncertainties suggest a cautious outlook for the near future.
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