There is also rising speculation that the Bank of Japan will expand its quantitative easing program to support a flagging economy.
Furthermore, the sudden surge in the Nikkei suggested that short-covering may have fueled gains. Short sales previously rose to 41.6% of all selling orders in the cash trading market on Friday, the highest level in at least five years, and remained elevated through Tuesday.
“There have been so many shorts that were irrelevant to fundamentals,” Koji Uchida, chief fund manager at Mitsubishi UFJ Asset Management Co., told the WSJ.
A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit.
A short squeeze occurs when investors with heavy short positions are forced to cover, or buy back, their shorts in the event of positive reports that result in a share appreciation. Consequently, the additional buying momentum from short sellers covering their options contracts helped bolster prices even further.
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Max Chen contributed to this article.