Stocks soared in Tokyo, with the Topix index headed for its biggest gain in more than seven years, as investors weighed signs shares are oversold and a report showing Japan's economy shrank more than expected last quarter boosted the outlook for central bank stimulus.
The Topix surged 7.2 per cent to 1,282.50 in afternoon trade in Tokyo, heading for its biggest gain since October 2008, after plunging 13 per cent last week. The Nikkei 225 Stock Average gained 6.1 per cent to 15,857.02 as the yen weakened for a second day.
US markets rebounded on Friday to halt the longest losing streak since September. Chinese mainland markets reopen Monday after a week long holiday during which global stocks fell into a bear market.
"Japan is massively oversold," said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. "Everyone is scrambling to get back in. Long-only investors are coming in along with retail and hedge funds. Plus, I would say there's a lot of short covering going on. Also, US shares rallied and we have China's market back on today."
The Topix's 14-day relative strength index fell to 26.49 on Friday, below the level of 30 which some traders say indicates that shares will rise.
A report Monday showed Japan's economy shrank 1.4 percent in the fourth quarter on an annualised basis, more than economists' forecast for a 0.8 per cent contraction.
All of the 33 Topix industry groups rose, led by insurers, tire makers, brokerages and consumer lenders. Megabank Mitsubishi UFJ Financial Group, which had fallen 41 per cent this year through Friday, jumped 8.1 per cent. Toyota Motor, the world's biggest carmaker, added 8.7 per cent as the yen weakened against the US dollar.
Online retailer Rakuten tumbled 4.5 per cent after reporting full-year profit slumped 37 per cent.
The yen capped its biggest two-week rally since 1998 on Friday, intensifying speculation the Bank of Japan may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus. Finance Minister Taro Aso said Friday the government is watching market movements and will take any action necessary.
Following a regular meeting with Abe, BOJ Governor Haruhiko Kuroda said he also would watch market moves closely.
"Japanese policy makers need to go on an all out war against the risk of a recession," Takuji Okubo, the Tokyo-based principal and chief economist at Japan Macro Advisors, told Bloomberg TV in Tokyo. The Bank of Japan "should keep on easing monetary policy. Prime Minister Shinzo Abe should definitely cancel the sales tax planned for next year. Policy makers need to show the market they are aware of the risks and they are doing everything they can to prevent a recession."