The Tokyo Stock Exchange Jumps 10% After a Crash: Has the Worst Been Avoided?

After a historic drop on Monday, the Tokyo Stock Exchange experienced a remarkable rebound at Tuesday’s opening. The Nikkei index, which had plummeted 12.4% the day before, rose by 10.02% shortly after opening. 

An impressive rebound after a black day

The Japanese financial market experienced a real emotional rollercoaster within 24 hours. On Monday, the market suffered its biggest point drop in history, victim of an explosive mix of recession fears in the United States and speculation on the yen. On Tuesday morning, the scenario was completely reversed.

Around 9:50 a.m., Tokyo time, the flagship Nikkei index stood at 34,610.65 points, soaring by 10.02%. The broader Topix index was not to be outdone, showing a 10.05% increase at 2,451.08 points. This spectacular reversal was partly fueled by a weakening of the yen against the dollar.

Toshiyuki Kanayama, an analyst at Monex, explains: “Japanese markets should start the day with a significant rise, with the yen weakening against the dollar, in addition to reacting to yesterday’s sharp drop.”

The shock felt in Tokyo had global repercussions. Wall Street experienced its worst session since 2022, with a spike in the “fear index” (VIX), even affecting the Asian stock market.

The yen: from enemy to market ally

The pivotal role played by the Japanese currency in this extreme volatility deserves special attention. On Monday, the sudden appreciation of the yen had contributed to market panic. On Tuesday, its decline appeared to be a stabilizing factor.

Stephen Innes, of SPI Asset Management, highlights this paradox: “It’s interesting to note that the yen, which played the villain in yesterday’s spectacular sell-off, could become today’s hero, offering a potential lifeline amid persistent volatility.”

This instability of the yen is linked to complex speculative movements, notably the “carry trade.” This practice involves borrowing in a low-interest-rate currency to invest in another offering better returns. The brutal unwinding of these positions amplified the turbulences in the Japanese market.

In short, the rebound of the Tokyo Stock Exchange offers a much-needed respite after a day of panic. However, the persistent volatility in global markets calls for caution.