An End in Sight for Japan’s Turbulent Markets?
After three weeks of heavy selling in Japan's equity market, not to mention volatility in government bonds, a degree of stability is now expected to return with stronger-than-expected economic data helping along the way.
The benchmark Nikkei 225 stock index closed almost 5 percent higher on Monday, helped by news that Japan's annualized gross domestic product growth (GDP) rose 4.1 percent in the first three months of the year, revised higher from a preliminary estimate of 3.5 percent.
(Read More: Japan Revises First Quarter Growth Figures Upwards)
"The GDP data blew the doors off with a 4.1 percent rise – where else are you getting that kind of growth?," said Nicholas Smith, Japan strategist at the brokerage CLSA in Tokyo.
Volatility has characterized trade in Japanese markets over the past three weeks, with concerns about an early end to the U.S. Federal Reserve's monetary stimulus program, instability in the JGB market and some caution about Japan's economic policies knocking the Nikkei off a 5-1/2 year high hit May.
"Volatility is contagious but it's hard to be sustained if it's just market volatility and not deterioration in economic conditions," said Tim Condon, head of Asia research at ING Financial Markets.
"Today's [Monday's] data are good and a hopefully a sign that 'Abenomics' will work," he said referring to the radical economic policies of Japanese Prime Minister Shinzo Abe that have helped brighten the outlook for the world's third biggest economy.
The rebound in the Nikkei pulled Japan's blue-chip stock index further away from the bear-market territory it flirted with on Friday after registering a fall of more than 20 percent from May's peak.
Analysts said signs stability in the Japanese Government Bond (JGB) market were also a positive for the Nikkei. The yield on the benchmark 10-year JGB was about 0.85 percent on Monday, about 15 basis points below a one-year high around 1 percent hit in May.
"Markets will calm down again," Frederic Neumann, the co-head of Asian economics research at HSBC said Monday on CNBC Asia's "Squawk Box." We have seen a lot of volatility in recent weeks – every time a central bank introduces quantitative easing, you have a period of volatility as the market adjusts to that so I'm not too worried about the JGB market," he added.
The BOJ has said it would buy 7.5 trillion yen ($743 billion) worth of long-term bonds a month – that's roughly 70 percent of new debt issuance – to help revive economic growth and end deflation. It's the uncertainty about what that hefty bond buying means for the JGB market that has led to market volatility over the past few weeks.
(Read More: A Central Bank Heavy Week for Asian Markets)
The prospects for structural reforms after next month's elections to the upper house of parliament that analysts expect Abe's Liberal Democratic Party to win were also expected to help the Nikkei recover.
"In the short-term there is an opportunity for another up leg in the equity markets especially with the prospect of reforms after the upper house elections," Mark Konyn, CEO at Cathay Conning Asset Management said on CNBC's "Cash Flow."
— By CNBC.Com's Dhara Ranasinghe; follow her on Twitter @DharaCNBC