Japanese stocks rebound 9% after global rout

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Japanese stocks surged on Tuesday, leading markets higher across Asia in a striking reversal of the previous day’s global sell-off, as European stocks also recouped some of their losses.

Japan’s Topix index closed 9.3 per cent higher and the yen stabilised at about ¥145.70 to the dollar after strengthening sharply in recent weeks. The tech-heavy Nikkei 225 rose 10.2 per cent.

European stocks steadied, with the region-wide Stoxx Europe 600 index up 0.2 per cent. US futures pointed to a modest rebound when markets open in New York. Contracts tracking the S&P 500 and the Nasdaq 100 were trading 0.8 per cent higher.

The return of relative calm comes after global markets tumbled in recent days amid fears the Federal Reserve has been too slow to respond to signs the US economy is cooling, and that it could be forced to play catch-up with a series of rapid interest rate cuts. The Japanese stock market was hardest hit, plunging more than 12 per cent on Monday, days after a surprise Bank of Japan rate rise.

Tuesday’s dramatic rebound in Tokyo was so intense that trading in Nikkei and Topix futures contracts was automatically suspended during the 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.

The rally was echoed across other Asian markets, with South Korea’s Kospi up 4.2 per cent on Tuesday. The Taiwanese stock index, which had its worst sell-off in history on Monday, closed 3.4 per cent higher as chipmaker TSMC climbed 8 per cent.

Asian markets had reacted “excessively” to US economic risks and geopolitical tensions in the Middle East, South Korean government officials said. They vowed to take swift action to stabilise the market in the case of excessive volatility. In Seoul, chipmakers Samsung Electronics and SK Hynix rose 2.2 per cent and 4.4 per cent respectively.

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 20 per cent. Carmaker Honda gained more than 14 per cent and semiconductor equipment maker Tokyo Electron was up more than 16 per cent.

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. “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 he saw a sharp sell-off as a buying opportunity.

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.”