A two-hour session of thin trading volumes and choppy buying activity brought to a close the worst year for shares on the Tokyo Stock Exchange.

Although the half-day session - and, indeed, the entire month of December - finished on a positive note, the modest gains came nowhere close to offsetting the 42 per cent decline suffered by the Nikkei 225 index since the start of the year.

Brokers at Tokyo Mitsubishi UFJ said that, even after the market's first positive month since May, there remained a need for caution. The share price gains throughout December were achieved on exceptionally low volumes - Tuesday's session marked the lowest level all year - and many investors suspect that share prices may have been boosted by a spate of pre-year-end “window dressing”.

Japanese banks, insurers and other companies with high exposures historically have tried to manipulate stock values higher towards the end of the quarter by making high offers during periods of lower volume trading.

The December gains in share prices have coincided with what many brokers believe is an unprecedented deluge of terrible economic data, company profit warnings and analyst downgrades. Japan is undergoing a sharp economic decline as industrial production is cut and the corporate sector retrenches on a scale not seen for almost 20 years.

December's modest gains brought the Nikkei to 8,859 points - a far cry from its late 1980s peak of 38,000.

Japanese stocks have suffered disproportionately badly in the global sell-off, with analysts pinning much of the blame on the high liquidity of the Japanese market and the specific troubles unleashed by the unwinding of the worldwide yen “carry trade”.

Since the global financial crisis struck and despite their relatively strong cash and business positions, Japanese shares have endured a “perfect storm” of selling. As the worldwide leverage bubble was inflating, a large portion of the borrowing appears to have exploited the extremely low interest rate environment in Japan: yen could be borrowed with interest rates at next to nothing and then converted into the currency of the desired investment target. When currency markets turned volatile, hedge funds hit the panic buttons and the yen began to climb, the carry trades had to be unwound in short order. That served to exacerbate the rise of the yen, which has in turn mauled the profitability of Japan's huge export sector and, consequently, many of the constituents of the Tokyo Stock Exchange.

As the crisis deepened and hedge funds on Wall Street and in the City started to face redemption calls, the Japanese market provided the quickest and most convenient way of raising capital in a hurry, exacerbating the pace of share price declines.

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