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Nikkei Goes for Wild Ride for Second Day

Friday, 24 May 2013 | 2:08 AM ET
Pedestrian are reflected in an electronic stock board in Tokyo, Japan, on Friday, May 24, 2013.
Junko Kimura | Bloomberg | Getty Images
Pedestrian are reflected in an electronic stock board in Tokyo, Japan, on Friday, May 24, 2013.

Japan's stock market witnessed a second-straight day of heightened volatility on Friday, swinging from gains of 3 percent to deep losses before bouncing back again, leaving traders puzzled as to what was going on in Asia's biggest stock market.

The Nikkei, which rose about 3 percent in early trade, fell more than 3 percent in the final hour of Tokyo trade before paring those losses. The Nikkei closed up 0.9 percent at 14,612 points.

(Read More: Choppy Bond Markets Put Japan Banks on Edge)

Some traders put the brief, sharp sell-off in the Nikkei's down to a rise in the yen following reported comments from Bank of Japan (BOJ) Governor Haruhiko Kuroda that the central bank had announced sufficient monetary stimulus.

"It's just gone crazy again hasn't it?," said Chris Weston, chief markets strategist at trading firm IG in Melbourne. "The comments from Kuroda that they [BOJ] may be done with easing may have had an impact."

The BOJ shocked markets in early April by announcing that it would pump $1.4 trillion into the economy to meet a 2 percent inflation target in about two years. That stimulus has helped drive the value of the yen down and propel stock markets higher this year.

(Read More: BOJ Kuroda Vows to Calm JGBs, Guide Recovery)

But the radical monetary policy has also sparked volatility in the bond markets as traders try to assess the implications for bonds and a spike in yields has in turn led to some jitters in the equity market.

"From the equity market's point of view, we want to see a central bank that is flexible and say if yields are going to rise, we will front-load purchases of JGBs," Weston said.

Other analysts said the Nikkei's performance was not unusual and was part of a correction from lofty levels.

The Nikkei has seen a stellar rally since mid-November as Japanese policymakers make a concerted effort to revive the economy. Even after this week's sell-off the Nikkei is up about 60 percent from where it traded late last year.

(Read More: Mammoth Japan Stimulus Still Not Enough: Hayman's Bass)

"We're up more than 60 percent from December levels on the Nikkei, so at some point there was going to be a correction," said Richard Yetsenga, head of global markets research at ANZ in Sydney.

Analysts said another reason for the renewed turbulence in Japanese equity markets could be a rotation by big Japanese institutional investors out of equities into bonds to take advantage of higher yields.

"There is some rebalancing talk on the trading floors – that a couple of large Japanese trading funds that have huge pockets are selling stocks and allocating them back into bonds," said Weston at IG. "There's no proof of that yet, but that's the talk."