That dynamic began to reverse July 31, when the Bank of Japan unexpectedly raised its key interest rate for only the second time in nearly two decades. This move, coupled with indications from the US Federal Reserve of imminent rate cuts, led to a swift appreciation of the yen.

Last Friday, the yen, which had been trading around 161 to the dollar just weeks earlier, had crossed below 150.

The breach of the 150 yen-to-dollar threshold, which traders viewed as a tipping point, exacerbated panic among investors who feared that companies would have to lower their profit forecasts.

The Topix index, which represents a broad spectrum of the Japanese economy, dropped 6.1 per cent last Friday — capping off its worst two-day performance since the 2011 earthquake and tsunami.

After the sell-off, the start of trading in Tokyo on Monday was seen as a test of whether confidence in Japanese companies would persist even without the yen’s support. Historically, Japanese investors have seized opportunities during foreign-led market meltdowns, and prices were low.

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The problem was that this time, the buyers hung back. Japan’s trading day was marked by a frenzy of selling: the Nikkei 225 Index, another benchmark index, posted its largest one-day point drop ever. Some called it “Black Monday”, recalling the global stock market crash in October 1987.

“After all of these reforms and stability and the Tokyo Stock Exchange pushing for better capital returns, you still saw no bid from the Japanese investor,” said Jesper Koll, a director at Monex Group, a financial services firm. “It got spooky,” he said.

On Tuesday, Japanese shares began to recover. The Nikkei 225 Index rebounded by 10.2 per cent, and some traders speculated that the market might have reached a settling point after factoring in a stronger yen.

One 43-year-old Japanese investor who asked not to be named, a former operator of a cram school in the Tokyo area, said that despite feeling “scared and wanting to escape”, he bought stocks on Monday. When prices rebounded he pocketed the equivalent of around $US2700 ($4121) and went off to take his children to a play centre.

The question — which no one, of course, can answer — is whether the weak-yen, high-stock-price bubble has fully deflated.

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On Wednesday, Japanese indexes continued to recover, though movements were relatively small. The Nikkei 225 closed up 1.2 per cent, while the Topix gained 2.3 per cent. Japanese indexes had broadly returned to where they were at the start of the year.

Nomura Research Institute, in a note, suggested that the weaker yen started pushing stock prices higher at the start of 2023, when the Nikkei was hovering around 26,000. That could mean that stocks might fall by another third from where they are now if all of the yen-related rally reverses. For many companies and their investors, that would be a painful adjustment.

Joy Yang, who leads Asian economic research at Point72, a hedge fund, said she is waiting to make judgments on Japan’s economy and stocks until markets have calmed and several key indicators are released. For example, economic output figures due next week will show whether newfound inflation in Japan is helping stir growth, she said.

“For now,” Yang said, “we are waiting for the markets to settle, and we’ll see how to go forward from there.”

This article originally appeared in The New York Times.

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