Japan’s stock market rally fades as fear returns

Hong Kong CNN —

A comeback rally in Japanese stocks has quickly lost steam, as the specter of a US economic slowdown and further yen volatility cast a long shadow across global financial markets.

The Nikkei 225 ended down 0.7% on Thursday, snapping a two-day winning streak. Meanwhile, the yen strengthened 0.6% to 146 against the US dollar, after losing nearly 2% on Tuesday and Wednesday combined.

The benchmark Japanese index had soared in the past two sessions after a dramatic rout on Monday, as investors took some solace from the words of central bank officials.

But Thursday’s chill spread to Europe, with the region’s benchmark Stoxx Europe 600 Index trading down 1% by 3.43 a.m. ET. Germany’s DAX and France’s CAC 40 were down 0.8% and 1% respectively, while London’s FTSE 100 was 1.1% lower.

US futures were also signaling a weak start for stocks on Wall Street. S&P 500 futures were down 0.5% and Nasdaq futures 0.4% lower.

On Wednesday, Bank of Japan (BOJ) deputy governor Shinichi Uchida said policymakers would not raise interest rates “when financial markets are unstable.” He sought to calm nerves after expectations that Japan would continue to tighten monetary policy sent markets into a tailspin on Monday.

The surge in the yen, which started when the BOJ signaled a hawkish tilt in monetary policy in recent weeks, forced many hedge funds and other investors to unwind so-called carry trades, a popular investment strategy that involved borrowing money very cheaply in Japan to invest in other markets. That reversal exacerbated the declines across global equity markets.

Uchida said Wednesday he believed the US economy would achieve a soft landing even as concerns had risen that the Federal Reserve had fallen behind in