Japanese Equities

The equity market correction, already anticipated because of the rapid rise and a stronger yen weighing on Japanese export stocks, has been dramatically accelerated by panic selling overnight.

Japanese equities were hammered on Monday night, with selling spurred by rumours of a potential scandal in a high-flying stock. This widened into panic selling last night as it was confirmed that there was a fraud investigation into fashionable internet stock Livedoor. The Tokyo exchange was suspended 20 mins early (the first time in its history). The Nikkie 225 closed 465 points or 3% down, having been off 5% at one point.

Objective view: 1) The suspension of the second largest market in the world is no small matter. However, the authorities stopped dealing because the system’s 4.5mn trades limit had nearly been reached. In other words the suspension was largely technical; the index was rising at the time. 2) Livedoor had become a classic ‘bubble’ stock with apparently significant investor borrowing on the back of its meteoric rise. At the moment the scandal seems to surround share dealing fraud by its founder rather than fundamental problems with the company itself. 3) The broad market appears to be in the midst of a larger correction in response to the strengthening yen. The second section of small cap stocks (largely domestic plays) has fared better, although it too has taken a hit after soaring 35% in the prior three months. Given their much higher weighting in export stocks, we can anyway expect further yen strength to weigh on Japanese large caps in the coming months.

Bottom line: These events will undoubtedly dent confidence, both in Japan and elsewhere. However, provided consumer confidence isn’t unduly impacted, the bullish fundamental story remains intact and any overreaction will likely be seen as a buying opportunity (some Japanese Investment Trusts are off 10%+ this morning).

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.