A series of sudden, nervy afternoon rallies in Tokyo and Hong Kong dramatically rescued Asia’s big exchanges from what was fast becoming yet another day of steep declines.

The sharp recovery, which was particularly strong in Japan where the Nikkei soared 6.4 per cent, coincided with several hours of extreme volatility on currency markets.

The yen backed away from the potentially disastrous Y90 level against the US dollar and sank 4 per cent against the euro.

The fall in the yen offered temporary relief to the likes of Canon, Sony and Toyota, whose shares have been savaged in recent days.

Brokers at CLSA, the brokerage group, pointed out that with the Nikkei at 1982 levels, the market is behaving as if no value had been added to the Japanese economy since that time.

But Japan’s huge, export-led economy has been forced to watch in horror as the yen has roared higher, session after session in recent weeks.

With every Y1 move upwards against the greenback, billions are wiped from Japan Inc's bottom line, and investors are expecting a string of profit warnings to add to those already announced.

The late surge of buying followed a “portfolio killer” session on Monday, where the Nikkei fell to a 26-year low and the Hang Seng shed nearly 13 per cent of its value in a few hours trading. The Hang Seng today clawed back just over 6.1 per cent.

At one point on Tuesday, it appeared that there were worse falls in store for Asian shares — the Nikkei dropped below the 7,000 point level before lunch.

That level has been red-flagged by analysts as a “discomfort zone” where the capital of Japan’s leading banks starts to diminish to dangerous levels.

The Japanese banking sector was battered throughout the day as more lenders appeared to be in trouble because of the unrealised losses on their considerable stock portfolios.

The country’s dozens of regional banks are considered particularly vulnerable because of slack management and over-exposure to the more “bubbly” aspects of the stock market such as small property companies.

Several large Asia-focused funds were understood to have liquidated yesterday, with market strategists giving warning that there was no obvious floor to the selling.

Markets were partly cheered in Tokyo by the acceleration of the Japanese Government's measures for calming the markets and introducing some buying pressure.

The Financial Services Agency said that it would immediately introduce a ban on the practice of naked short selling — shorting the stock without borrowing the shares first — and gave itself the scope to place more restrictions on short-selling as the situation demands.

The rally began in earnest as that meeting was going on; brokers said that they saw significant covering of short positions by several hedge fund clients, but that the move had chiefly behaved as a catalyst. “It wasn’t the actual buying pressure released by the announcement that turned the market around,” said one Nomura broker, “it was the sense that the authorities are taking it seriously enough to implement these measures as soon as they come up with them.”

He added that there were now high hopes for the market impact of other government efforts by Japan to restore some sanity to Tokyo stocks.

These include re-introducing the system of buying shares directly from the portfolios of the banks — a process last used between 2002 and 2006 in which around Y1.6 trillion worth of shares from all industrial sectors were purchased by the state.

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