Japanese shares rebounded on Tuesday after plunging on Monday and sending shockwaves through global financial markets.
The Nikkei 225 stock index jumped by 10.23%, or 3,217 points in its biggest one day gain in points, which almost reversed the previous day’s record drop.
In Europe, the FTSE 100 and stock markets in Paris and Frankfurt steadied.
The sharp fall in Tokyo followed the Bank of Japan’s decision to raise interest rates for just the second time in 17 years.
It sent the yen soaring against the dollar making Japanese stocks – and the country’s exports – more expensive for foreign investors and buyers.
The Nikkei’s 12% drop at the start of the week weighed on global stock markets. At the same time fears that the American economy is heading for a slowdown also hit shares in the UK, Europe and in the US.
On Tuesday, the FTSE 100 opened higher, albeit a modest 0.33% gain, before dropping.
Stock markets in France and Germany also edged ahead in early trading but later fell back.
Commenting on the outlook for Japan, Jesper Koll, executive director of Monex Group Japan, said he still had confidence in the country.
“Japan’s fundamentals are strong, recession risks are nil and corporate leaders are dead-set on raising capital returns,” he told the BBC.
Stocks markets in South Korea and Taiwan also regained ground, rising around 3.5%, after record falls.
The focus will now shift to the US where the technology-heavy Nasdaq index saw a further drop of 3.4% , although that was far below recent falls.
On Monday, the S&P 500 fell 3% and the Dow Jones Industrial Average ended 2.6% down.
Investors have been spooked by weak employment data in the US, which showed that companies created fewer jobs than expected in July while the unemployment rate rose.
It has stoked speculation about when – and by how much – the Federal Reserve could cut interest rates.
Last week, it voted to hold interest rates while other central banks decided to cut them.
“The Federal Reserve missed an important opportunity to cut interest rates last week like the Bank of England did,” said economist Mohamed El-Erian, who is also president of Queens’ College, Cambridge.
The Fed had signalled that a rate cut in September was on the table. But Mr El-Erian told the BBC’s Today programme that by waiting “it risks tipping the economy further towards a higher probability of recession.”
A number of experts have cautioned that it is premature to suggest the world’s largest economy is heading for a downturn.
But if it does, it would have wider implications.
“What happens in the US economically and financially does not stay in the US,” said Mr El-Erian.
“The US has been the major driver of global economic growth, the US consumer is a very important engine of economic activity so the world as a whole would suffer if the US were to go into recession.”
The wait for the Fed’s next meeting will also likely mean stock markets remain unsettled.
“Markets are very volatile at the moment and will likely stay volatile until the Fed decision in September, so we wouldn’t rule out rapid swings in both directions,” said Stefan Angrick, a senior economist with Moody’s Analytics.
