Japan is the major trading partner of China’s, accounting for 19% of the nation’s exports and eclipsing exports to the USA by 1%. Japan is also a key importing market for Chinese goods, accounting for 22% of Japanese imports. For these reasons, it is pretty obvious why a slowdown in the Chinese economy (and/or the accompanying turmoil on the Shanghai stock exchange) will have a negative effect on Japanese stocks.

The recent and abrupt (partial) deflation of the Chinese stock market saw some 40% wiped off share values as investors worried about an easing off of the pace of Chinese economic expansion. This had two effects on Japan: firstly, as a perceived safe haven currency, the Yen has been appreciating against other major currencies and, secondly, the gains that the Nikkei has made in 2015 (roughly 3000 points) erased by COB yesterday. The Nikkei had lost approximately a seventh of its peak 2015 value by Tuesday’s close. The Yen has rallied from a pre-crunch level of 119.4 to the Dollar to a current value of 120.6 (although it hit 125.6 back in early June as the market began its slide). As the Yen rises, it makes Japanese exports less competitive in importing markets.

Wednesday’s trading session in Japan saw a return of the Bears as the market put on 7.7% of its value, marking the best single day’s trading gains since 2008. The resurgent optimism seems to be based on a number of factors including a probable cut in corporate taxes in Japan. Also, the recent turmoil in China is thought to make a further round of stimulus measures more likely. US shares were higher on Tuesday which also brightened investors’ moods. In China, the Shanghai Composite Index also rallied to put on 1.2%. Time will tell if the bottom has been reached in the summer stock crash or if this new-found optimism will quickly peter out.

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