Japan's Nikkei 225 rebounds as economic concerns ease

Japanese stocks rebounded as concerns over the long-term impact of Friday's earthquake and tsunami on Japan's economy ease.

The Nikkei 225 index gained 4.3% by midday Wednesday.

On Monday and Tuesday, the index dropped more than 16%, its biggest two-day fall in 23 years.

Investors are optimistic about a recovery in the economy despite reports of another fire at the Fukushima Daiichi nuclear plant.

However, analysts warned that the markets will remain volatile in the short term.

"The nuclear crisis still looms large," said Hiroichi Nishi of Nikko Cordial Securities.

"We'll have to see investors' reaction to the latest news about the nuclear plant," he added.

Stocks of financial companies, exporters and car companies like Toyota and Nissan Motors are amongst the big winners.

These sectors and stocks were amongst the hardest hit in the sell-off following the earthquake and tsunami.

'Panicked too much'

But whilst there is optimism in the air, many analysts believe there are other factors to consider.

"The rebound is pretty strong as investors realised they may have panicked a bit too much yesterday," said Fujio Ando of Chibagin Asset Management.

Mr Ando believes that the markets may be distorted as traders try to cover bets they took that the market will continue to fall.

Many traders borrow shares they don't own promising to repay them at a later date at a fixed price.

They then sell the shares, hoping to buy them back at a cheaper price in a falling market, thus making a profit on the difference, a practice called short selling

"It's mostly short covering by both domestic and foreign players, and not honest, active buying, because nuclear worries are still strong," Mr Ando said.