A switchback session for Tokyo saw shares slip close to the psychologically important 17,000 level in early trading only to reverse that with a storming 1,100 point rise at one stage on short covering.
The Nikkei index eventually closed 815.14 points ahead, or 4.71 per cent, to 18,118.79, offsetting part of the 2,142.35 point fall over the previous four trading days.
Japanese investors, suffering from historically low interest rates, have fled to other markets for better returns on their money. On Friday alone, the index slid 770 points, the biggest drop since January 1995.
Keiko Kondo, a strategist at Merrill Lynch Japan, attributed the rebound to bottom-fishing. "Since last week's fall was so sharp, the index [at current levels] looked attractive and bargain-hunters emerged." But he cautioned that the market could again be hit by companies taking profits on shareholdings ahead of corporate book closings at the end of March.
Analysts called the rebound technical, however, and said it did not signal any major reversal of the bearish trend, adding that the market was still gripped by worries about the economy and the health of some financial institutions.
This analysis was at odds with the futures market, where March contracts briefly surged nearly 1,000 points before closing at 18,130, up 980 points.
Rumours that the government was preparing to step in to support share prices were quashed, but there was evidence of damage limitation. Shoichiro Toyoda, chairman of the powerful business lobby Keidanren, said: "Although there is not much confidence in the economy, I don't think the conditions at the moment are bad."
Asked about recent weakness in the stock market, Mr Toyoda said he was worried about the price falls, but added that movements in stock prices did not necessarily coincide with those in corporate earnings.
Meanwhile, the Prime Minister, Ryutaro Hashimoto, was reported as saying that Japan's economic policy should not be formed only by looking at current stock prices, while other government sources said they did not expect the economy to be hurt by the stock market's weakness.
The Tokyo bounce, coming on the back of Friday's rally on Wall Street, saw several European stock markets close at record highs yesterday. In London, the FTSE 100 index broke through the 4,100 level, ending 50.7 points ahead at 4,107.3, just short of the all-time high of 4,118.5 struck on New Year's Eve.
Wall Street rose further in morning trade, but the Dow was up only around 10 points as European markets closed. It ended on a new high, up 5.39 points at 6709.2.
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