Asian equities ended a volatile week on a calm note, recovering some of the poise lost when Japanese stocks sank into bear market territory.
The best gauge of what is happening to stocks remains the currency markets, where the rapid unwinding of underwater short yen positions saw investors sell stocks to close those positions.
The yen has strengthened to 95 against the US dollar from 102 on May 23, while the stock market's Nikkei-225 Index fell nearly 19 per cent in the same period.
Yesterday, as the yen weakened to 95.01 per dollar from a 10-week high of 93 on Thursday, the Nikkei rebounded 1.94 per cent.
Market watchers said the decline in equity prices over the past few weeks was partly triggered by the short squeeze in yen. Investors who held short positions in the currency were forced to purchase their holdings after the prices rose rapidly.
"Yen became a safe haven after the government did not show enough intention to carry out quantitative easing," said Tommy Ong, an executive director of treasury and markets at DBS Bank. "Short-term investors want to buy yen especially ahead of the [Group of 8] summit and [US Fed policymakers'] meeting."
The US Federal Reserve will meet next week, with investors looking for signs of how the central bank will start tapering off its bond buying programme. Meanwhile, the Group of Eight richest nations will gather in Northern Ireland next week where Japan is expected to be questioned on its money printing scheme.
Ong expects the yen to stay in a comfortable zone between 95 and 105 against the dollar, adding that 95 would be a very tough barrier to crack.
All Asian markets rebounded yesterday as investors positioned capital in some defensive stocks after a heavy pull-back earlier this week and following a rally on Wall Street.
Hong Kong rose 0.39 per cent, trimming the week's loss to 2.8 per cent for the fourth consecutive weekly decline. The Shanghai Composite Index gained 0.65 per cent, while the Philippine market gained 2.1 per cent and the Indonesian market rallied 3.32 per cent.
"The markets bounced back. People looking for gains were in Asian credit or banking cash in a safe place. We don't see volumes coming back and the trend is obviously outflows. We are not yet reaching a level where the market will be perceived as 'oversold'," said Francois Perrin, the head of greater China equities at BNP Paribas Investment Partners.