Japanese stocks recover spectacularly after historic crash

After Japanese stocks recorded a historic drop of 12 percent the previous day, they showed a remarkable recovery in early trading on Tuesday. The broad Topix index rose by 8.3 percent in the first hour of trading, as investors cautiously hunted for bargains and the yen stabilized at around ¥145.70 after rising over a two-week period. Traders warned of extreme volatility in the coming hours, reflecting the nervousness in global markets. These had recently declined amid concerns that the Federal Reserve had been too slow to respond to signs of a slowdown in the U.S. economy and might be forced to implement rapid interest rate cuts. The global sell-off was amplified by the unwinding of the so-called yen carry trade, where traders benefited from low interest rates in Japan to borrow yen and purchase riskier assets. Despite severe declines in U.S. markets overnight, including a 3 percent drop in the S&P 500, the Topix gained on this Tuesday. The narrower and technology-heavy Nikkei 225 average recovered by 8.2 percent. Atul Goyal, an equity analyst at Jefferies, noted that fear dominated the markets, but the plunge of certain Japanese stocks on Monday had been "vastly exaggerated." On Tuesday, a broad range of stocks rose, led by soy sauce manufacturer Kikkoman, whose stock increased by more than 17 percent. Shares of automaker Honda and semiconductor equipment manufacturer Tokyo Electron also rose by 15 percent each. Financials, telecommunications, industrial companies, and parts of the technology sector were the focus of buying, after Nomura strategist Tomochika Kitaoka described the events as “something akin to a taper tantrum.” A surprise interest rate hike by the Bank of Japan the previous week had pushed the yen higher and triggered a three-day selling spree in stocks, culminating in the dramatic plunge on Monday. By the close of trading on Monday, the Topix had lost all its gains for the year, after reaching an all-time high on July 11. After the market closed in Japan on Monday, traders and analysts scrambled to explain the extremes of the sell-off. Questions arose about how an intensified debate over the possibility of a U.S. recession and a return of the dollar-yen rate to January levels could have caused one of the country's worst market collapses. Kiran Ganesh, multi-asset strategist at UBS, said: "There must have been a forced or technical selling wave, as fundamentals don’t change by 11-12 percent over a weekend." He added that the sharp sell-off represented a buying opportunity, but the market would need to see where the yen settled. Others, including Nicholas Smith, strategist at CLSA Japan, pointed to the exaggerated influence of algorithmic trading programs, which may have specifically reacted to the recent sharp upward movement of the yen. Smith noted: "It appears that they are correlated with the yen. After all the hype about the prospects of AI, it now seems that AI may have brought us into this mess.