Japanese shares rally hard after biggest sell-off since 1987 Black Monday crash

Japanese stocks rebounded sharply on Tuesday from the previous session's searing sell-off and double-digit losses as Federal Reserve comments and data gave investors pause in their concerns over equity valuations and a possible US recession.

The benchmark Nikkei's rally, after the market's biggest single day rout since the 1987 Black Monday crash, came as the yen reversed its gains, indicating the carnage in yen-funded global carry trades too was easing.

In a turbulent day of trading, the Nikkei closed up 10.2% at 34,675.46, after plunging 12.4% on Monday, leaving investors feeling whiplashed. The index finished up 3,217.04 points, notching its largest ever single-day point gains. It was also the Nikkei's biggest daily percentage rise since October 2008.

The broader Topix (Tokyo stock price index) climbed 9.3% to 2,434.21.

Investors had been shaken by last week's plunge in global stock markets, US recession risks, and worries investments funded by a cheap yen were being unwound, triggering a sell-off in Japanese equities on Monday.

Traders said they now appeared to be reconsidering the severity of their initial response, buying back shares on the dip.

"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 Southeast Asia at abrdn.

The Nikkei rally helped lift other Asian stock markets. Overnight, safe-haven US yields too had risen from lows in a sign the panic was abating.

But uncertainties remained, with analysts pointing to the possibility of more volatile market moves in the near-term.

"We're not yet sure if this is just a breather between water-boardings or there is more pain to follow," said Matt Simpson, senior market analyst at City Index.

Japanese officials meanwhile scrambled to calm markets, with Prime Minister Fumio Kishida urging caution and calling on market participants to stay calm.

An emergency trilateral meeting of the Ministry of Finance, Financial Services Agency and the Bank of Japan was held at 0600 GMT to discuss markets.

BOJ in a hurry?

Khoon Goh, head of Asia research at ANZ, noted that the Nikkei also rebounded to varying degrees after the three previous occasions when it experienced double digit declines, including in the wake of the global financial crisis in 2008 and Tohoku earthquake in 2011.

"But it took a while before the Nikkei clawed back all those losses," he said.

From July 11 to Monday's close of 31,458.42, the Nikkei has seen 113 trillion yen ($792 billion) wiped off its peak market value.

Monday's collapse was a "reminder that it is next-to-impossible to diversify equity risk by region (or by sector or style) during major corrections or bear markets," said Stephen Dover, chief market strategist and head of Franklin Templeton Institute at Franklin Templeton.

"Opportunity will arise, but in our view, it is premature to step in at this point."

Last week, the BOJ raised interest rates to levels unseen in 15 years, a hawkish move that analysts also say spooked the market especially given fears of a possible US recession.

"The market was afraid (the BOJ) may tighten too fast," said Kenji Abe, chief strategist at Daiwa Securities.

BlackRock Investment Institute said on Tuesday that they see a "greater risk of a BOJ policy misstep" and are reviewing their Japan overweight position.

On Tuesday, big name shares like chip-related stocks Tokyo Electron, up over 16%, and Advantest, rising 15.5%, surged to give the Nikkei a sizeable boost.

AI-focused startup investor SoftBank Group jumped 12.1%, and Uniqlo parent firm Fast Retailing gained 7.8%.

Circuit breakers were triggered multiple times before and during the sessions, causing the temporary suspension of trading in Topix and Nikkei futures.

Reuters