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What made Japanese markets explode higher after the close?

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Don't worry about the five per cent point swoon in the Nikkei last night – that information's already outdated.

Officially, the main Japanese equity benchmark ended Thursday's session down a gutwrenching 737 points or 5.2 per cent. But, an after-hours Reuters report suggesting that the Japanese government is set to ease restrictions on public pension fund investment in equities sent the active Nikkei futures contract exploding higher, regaining 400 index points.

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The new regulations are not yet official – Reuters cites the shadowy "people familiar with the deliberations" – but the immediate positive reaction in futures markets signals the potential benefits to Japanese equity prices. The discussions are allegedly focused on the country's 1 trillion yen ($10.24-billion Canadian) Government Pension Investment Fund (GPIF) which is currently enduring losses as Japanese bond prices fall.

So, the madness in Japan continues. After an 80 per cent climb for equities between November and May 22 (notably this is also the day US Treasuries began to sell off), the Nikkei now stands 15 per cent from the highs.

There will undoubtedly be information leaks, denials or confirmations regarding pension fund rule changes between now and Friday's market open so the 400 point rise suggested by the futures markets is not guaranteed. U.S. equity markets have also been sensitive to Japanese assets in recent days, so the activity is all the more relevant.

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