Japanese Shares Make a Strong Comeback After Historic Plunge
On Tuesday, Japanese stocks experienced a remarkable recovery, recouping nearly all of the substantial losses endured on Monday, which marked the most significant plunge since the notorious Black Monday crash of 1987. This rebound was bolstered by optimistic comments from the U.S. Federal Reserve and encouraging data, leading investors to reassess their fears over a potential recession and the valuations of equities.
In the wake of Monday’s sell-off—the worst single-day rout since the 1987 Black Monday crash—the Nikkei index surged 8 percent to 33,975.53, demonstrating a powerful rally. This surge effectively reversed the yen’s gains and signaled a stabilization in the yen-funded global carry trades that had seen chaos. By midday, the Nikkei was up 2,623.1 points, having earlier soared over 3,000 points to set a new record for its largest intraday points gain.
The broader Topix index also saw a significant rebound, with a 7.5 percent increase to 2,394.33, as investors, shaken by the previous week’s dramatic sell-off across global stock markets, U.S. recession concerns, and the unwinding of yen-funded investments, began to buy back into the market. According to Ray Sharma-Ong, head of multi-asset investment solutions for Southeast Asia at abrdn, the fundamentals of the Japanese economy remain unchanged. He suggests that the recent sell-off was driven largely by the unwinding of the carry trade.
This rally in the Nikkei was not isolated, as it also helped uplift other Asian stock markets. U.S. safe-haven yields rose from their lows overnight, hinting at a reduction in panic levels. However, despite this recovery, analysts caution that the market may still face volatility, with unpredictable movements possible in the near term.
In response to the market’s tumult, Japanese officials, including Prime Minister Fumio Kishida, have urged calm and deliberation among market participants. An emergency meeting involving the Ministry of Finance, Financial Services Agency, and the Bank of Japan was announced for discussions on market conditions.
Historically, the Nikkei has managed to recover from double-digit declines, such as those experienced during the global financial crisis of 2008 and the Tohoku earthquake in 2011. However, recovery to pre-crash levels has often taken time, reminding investors of the inherent risk in attempting to diversify equity risk by region, sector, or style during significant market corrections or bear markets, as noted by Stephen Dover of Franklin Templeton.
Recent actions by the Bank of Japan (BOJ), which raised interest rates to a 15-year high, have contributed to market anxieties, particularly amid fears of a potential U.S. recession. This move has sparked fears of the BOJ possibly tightening monetary policy too swiftly.
On Tuesday, notable rebounds were led by major technology shares, including chip-related companies like Tokyo Electron, which saw a 15 percent increase, and Advantest, with a rise of over 13 percent. SoftBank Group, an AI-focused startup investor, also saw a notable jump of 8.6 percent. The trading day was marked by multiple triggers of circuit breakers, temporarily halting the trading of Topix and Nikkei futures on several occasions.
While the immediate rebound has provided some respite to investors, the broader implications for Japan’s stock market and the global financial landscape remain under close observation as investors and analysts alike monitor the Bank of Japan’s next moves and the potential for further volatility in the markets.
