A wave of buying swept across Asian markets on Thursday as investors responded to the overnight interest rate cut by the US Federal Reserve and the prospect of “bold” economic stimulus measures in Japan.

The Nikkei’s 10 per cent jump, rising 817.8 points, followed yet more softening of the yen, bringing relief to exporters such as Canon, Toshiba and Fujitsu with large exposure to foreign exchange movements.

The surge meant that, by the closing bell, the Nikkei was back above the critical 9,000 point mark — the break-even level at which the huge stock portfolios of the Japanese banks are no longer generating losses.

When the index briefly breached 7,000 points on Monday, analysts warned of a capital crisis within the Japanese financial sector and the need for widespread emergency funding measures.

Traders at Nomura said that the sharp drop in the yen, now trading below Y98 against the dollar, was being propelled by expectations of an interest rate cut by the Bank of Japan tomorrow.

Sources close to the central bank told The Times that, although a rate cut of 25 basis points to 0.25 per cent would make little practical difference to the economy, the decision had effectively been “steamrollered” by market expectations.

Last night, the US Federal Reserve cut its interest rate by half a point to 1 per cent.

Despite the broadly positive moves, bond traders at Royal bank of Scotland in Tokyo said there were numerous signs that the financial system remains in chaos.

Just as central banks around the world are pouring cash into markets, the Bank of Japan drained some Y1.5 trillion (£9 billion) of liquidity from the Tokyo money market as rate-cut expectations sent short-term rates below the bank’s official target.

In Tokyo, hedge funds were badly caught on the wrong side of the yen-related stock surge, forcing many to exit their short positions in a hurry, which in turn amplified the market gains.

The short squeeze, which one Mitsubishi UFJ broker said was “biting like a pitbull”, particularly affected Japanese exporters, but was felt across almost all sectors.

Hong Kong shares soared higher to complete a three-day rally that has advanced the Hang Seng index by some 27 per cent.

In South Korea, trading floors shrugged off persistent doubts over the fundamental health of the economy and banking system and pushed shares more than13 per cent higher.

Fund managers in Hong Kong ascribed the day’s buying spree to a “build-up of belief” that a market rebound was around the corner.

Nevertheless, analysts pointed out that dark clouds remained on the horizon.

The slight weakening of the US dollar prompted a rise in commodities, and an accompanying jump for shares of resource stocks across China and elsewhere.

More worrying, said some, was the news that Volvo received only 155 new orders in Europe for trucks in the most recent quarter — a 99.6 per cent slowdown from the previous year. Signs like that explain the huge drop in shipping rates and the “unavoidable” evidence of a global economic slowdown, said commodities brokers in Singapore.

In Tokyo, Taro Aso, the Prime Minister, is expected within the next couple of hours to launch a second stimulus package that may involve a Y2 trillion tax cut that could come in the form of cash payments.

Loan guarantees for small businesses are expected to be extended further and political analysts believe that the Government will unveil plans for around Y5 trillion in fiscal spending.

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