Western Whims Sink Japan Stocks
Heavy Investment
From Abroad Makes
Markets Vulnerable
By YUKA HAYASHI
March 15, 2007; Page C1
TOKYO -- Yesterday's selloff here put a fundamental weakness of the Japanese stock market into focus: It is one of the largest in the world but sometimes acts like just another emerging market.
Like some of the tiniest markets in developing countries, Japan's stock market is heavily dependent on foreign investors. The result: When foreigners are active buyers, the Japanese market surges. When they lose appetite, the market nose-dives.
"Foreigners really set the tone whether it's a bull market or a bear market," says Patrick Mohr, director of equity research at Nikko Citigroup in Tokyo. When Western investors start selling in their home markets, they are likely to also start selling stocks in markets such as Japan, he says.
After Tuesday's 2% drop in major U.S. indexes, the Nikkei Stock Average of 225 companies fell 2.9% yesterday, amid concerns that investors from the West would further withdraw from riskier investments overseas. In early trading today, the Nikkei was up about 1.5% after gains of less than 1% in the U.S.
The Japanese market also fell more steeply than others following the bigger global slide that began in late February, as U.S. and European investors moved cash into safer assets close to home, such as government bonds.
The Nikkei fell 8.8% from Feb. 27 to March 5, compared with the 5.2% fall for the broad Standard & Poor's 500-stock index in the U.S. and a 6.9% drop for the FTSE-100 Index in London.
The Nikkei has recouped 0.9% since March 5, to close at 16676.89 yesterday. That is similar to the gain in the S&P 500, while the FTSE-100 slipped less than 1% in the period.
Tokyo is the second-largest stock market in the world, after New York, in market value of domestically listed companies. But risk-averse Japanese investors, despite their huge financial assets, have sold more shares than they have bought in recent years. In contrast, foreign investors have been net buyers of Japanese stocks every year since 2001, as they have tried to cash in on the nation's economic expansion after a slump in the 1990s and early 2000s.
Last year, foreign investors accounted for a record 54% of the value of shares traded on Japan's top three stock exchanges in Tokyo, Osaka and Nagoya.
Analysts say foreign investors likely will continue to sell Japanese shares over the next several weeks, even if their recent aversion to risk starts to dissolve. Some investors are concerned that Japanese corporate earnings, which have been strong for the past five years as the economy expanded, may lose momentum in the fiscal year that begins in April, in part because of a slowdown in the U.S. economy. A rebound in the yen's value in the past few days also generated worries that earnings of Japan's big exporters would be eroded if the yen's rise makes their products less competitive overseas.
Others are growing impatient about what they perceive to be a recent slackening in Japan's efforts in economic reform. Some companies have adopted antitakeover measures, resisting a world-wide mergers-and-acquisitions trend that investors say would boost efficiency in many industries here.
Another concern: The Japanese government is considering beefing up measures to help the poor amid growing criticism of a widening income gap. Investors are worried that the government may pressure companies to raise wages or enhance employee benefits, which in turn may crimp companies' earnings.
"There is a possibility the Nikkei 225 may hit a second bottom under 16500 in April," Masatoshi Kikuchi, Merrill Lynch & Co.'s equity strategist in Tokyo, said even before yesterday's decline.
Foreign investors scaled back on buying Japanese stocks last year, with net purchases totaling 5.5 trillion yen ($47.3 billion) last year, down from 10 trillion yen in 2005. Their purchases had picked up since late last year, until the latest market downturn.
Japan's individual investors, meanwhile, are unlikely to pick up the slack anytime soon. Despite the recent economic expansion, most Japanese investors still are reluctant to put their money in stocks, unable to shake off bitter memories of the bear market just a few years ago that wiped out three-quarters of the market value of the Nikkei's stocks at one point.
Instead, Japanese investors have opted for more-stable investments like bank deposits and bonds. A big hit in recent years has been mutual funds that invest in high-yielding foreign bonds, which account for roughly two-thirds of Japan's overall mutual-fund assets. Many investors also have flocked to trading currencies using borrowed money, with a majority betting on a weakening in the Japanese yen against the dollar and the euro.
Last year, shares sold by individual investors on Japan's top three exchanges exceeded their purchases by 4.4 trillion yen, up slightly from 4 trillion yen of net sales in 2005. Japanese banks, brokerage firms and life insurers also were large net sellers of stocks, offsetting buying by Japanese mutual funds and corporate shareholders.
To be sure, Japan's individual investors have increased their presence in the stock market by other measures. The number of Japanese individual shareholders rose to 38.1 million in 2005 from 27.4 million in 1996, according to the Tokyo exchange. The total volume of transactions by individuals on the top three exchanges last year was more than double the level in 2004.
But the heavy volume suggests that many of these individuals were trading for the short term. Analysts say many Japanese change their holdings every few weeks, or even more frequently, chasing stocks with significant price moves. Unlike in the U.S., only a small portion of individual investors in Japan buy individual stocks or stock mutual funds to fund retirement or to save for their children's college education.
Some of these short-term investors apparently saw a buying opportunity when the market tumbled in late February. In the week ended March 2, the most recent data available, net purchases by individual investors totaled 508 billion yen, though selling by foreigners and Japanese financial institutions more than offset the buying. Analysts say individuals probably were active buyers again yesterday.
"Every time the market falls, we see individuals rush in to hunt for bargains," says Yosuke Shimizu, general manager of the investment-information department at Monex Inc., one of Japan's leading online brokerage firms. "When it goes up a bit, they sell to lock in profits."
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