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Japanese shares surged on Tuesday with their biggest one-day gain since October 2008, leading markets across Asia higher in a stunning reversal of the previous day’s global sell-off.
Amid pre-market warnings from traders of high volatility, the Topix index jumped more than 10 percent as investors started hunting for bargains and the yen steadied at around 144.607 yen after rising sharply in recent weeks.
The Topix’s rally and a 9 percent gain in the narrower, tech-heavy Nikkei 225 Average came despite sharp overnight declines in U.S. markets, including a 3 percent drop in the S&P 500.
The global market has has decreased in recent days Amid concerns that the Federal Reserve has reacted too slowly to signs that the U.S. economy is weakening and may be forced to catch up with a series of rapid rate cuts, Japanese stocks were hit hardest, however, falling more than 12 percent on Monday, days after the Bank of Japan unexpectedly raised interest rates.
But Tuesday’s rally was no less remarkable. At one point, the Nikkei 225 Average rose 3,453 points — its biggest one-day gain ever. The rush to return to Japan fair The market was so tense that trading on Nikkei and Topix futures was automatically suspended during Tuesday morning trading.
“One day down, then one day up. Nobody has ever seen a crazy market like this,” said Takeo Kamai, head of execution services at CLSA in Tokyo. “While the market has recovered a lot, the big picture is still uncertain — whether the Bank of Japan will raise rates again this year and whether the Fed will cut.”
The global sell-off was exacerbated by the end of the so-called yen carry trade, in which traders took advantage of low Japanese interest rates to borrow in yen and buy riskier assets.
“There has been no significant change in the fundamentals of the Japanese economy. It was the unwinding of the carry trade that drove a lot of the selling,” said Ray Sharma-Ong, head of multi-asset investment solutions for Southeast Asia at Abrdn.
“We are finally seeing some stability in the currency markets, with support for the yen at 145 per dollar,” said Jason Lui, head of Apac equity and derivatives strategy at BNP Paribas.
The rally was echoed across other Asian markets, with South Korea’s Kospi up 3 percent in morning trade. Taiwan’s stock index, which suffered its worst sell-off on record on Monday, recovered 1 percent while chipmaker TSMC rose 5.5 percent.
“South Korea and Taiwan are more influenced by broader sentiment about AI and concerns around [artificial intelligence] “capex,” Lui said, referring to concerns that tech companies have invested too much in AI capabilities.
Atul Goyal, Japan equities analyst at Jefferies, said while fear is gripping the market, the declines in some Japanese stocks on Monday were “overdone.”
A host of Tokyo stocks surged on Tuesday, led by soy sauce maker Kikkoman, which rose more than 17 percent. Automaker Honda rose more than 15 percent and semiconductor equipment maker Tokyo Electron rose 15 percent.
Financials, telecoms, industrials and parts of the technology sector were the focus of buying in Japan on Tuesday following what Tomochika Kitaoka, strategist at Nomura, described as “something like a narrowing tantrum”.
The BoJ’s rate hike last week sent the yen higher and triggered a three-day sell-off in stocks that culminated in a sharp decline on Monday. By the end of Monday’s session, the Topix had erased all of its gains for the year after hitting an all-time high on July 11.
Traders and analysts struggled to explain the extreme magnitude of Monday’s sell-off, questioning why there was such a heated debate about Possibility of recession in the US and the dollar-yen exchange rate returned to levels seen in January that triggered one of the country’s worst market crashes.
“There must have been some forced or technical selling because the fundamentals haven’t changed by 11-12 percent in a week,” said Kiran Ganesh, multi-asset strategist at UBS. He added that the sharp sell-off had created a buying opportunity, but the market would have to wait and see where the yen stabilizes.
Others, including Nicholas Smith, Japan strategist at CLSA, have pointed to the magnified impact of algorithmic trading programs, which may be a specific reaction to the yen’s recent sharp rise.
“It seems to be correlated with the yen,” Smith said. “After all the excitement about the prospects of AI, it now looks like AI may have gotten us into this mess.”
