Japan's Small Cap Weakness a Warning Sign for Global Small Caps?

Japanese smaller caps stocks have yet to fully recover from massive selling that started early in the year, induced by a securities fraud scandal involving one of Japan's most widely traded stocks. A Bloomberg journalist thinks this "may be a harbinger of what lies ahead for stock markets worldwide." 2007 is increasingly seen as the year of large caps, given slowing economic growth in Japan and the U.S., and also due to the continued out-performance of smaller caps, which makes large caps look more attractive, especially when considering their strong earnings growth. Another reason for small caps lacking popularity in Japan, even of late as the Nikkei has been rallying, is due to the weakening yen, which in most cases boosts earnings of the large cap exporters. Year-to-date, the Nikkei 225 Stock Average has gained 5%, while the Topix Small Cap Index has lost 12%. The Russell 2000 Index is up 18%, beating the S&P 500 by 4%. In Europe, the Dow Jones Stoxx Small Index is crushing the Large Index 30% vs. 16%.
• Sources: Bloomberg
• Related commentary: Seeking Alpha in Small Cap Japanese Stocks, Small Cap Stocks on SeekingAlpha
• Potentially impacted stocks and ETFs: Japan small cap funds: WisdomTree Japan SmallCap Dividend (DFJ), Japan Smaller Cap Fund (JOF), streetTRACKS Russell/Nomura Small Cap Japan (JSC). U.S. small and micro cap offerings by PowerShares: (PZI), (PZJ), (PWT), (PWY), iShares Morningstar: (JKJ), (JKK), (JKL), iShares Russell: (IWC), (IWM), iShares S&P: (IJR), (IJS), (IJT), streetTRACKS DJ Wilshire: (DSG), (DSV), Vanguard: (VB), (VBK), (VBR), WisdomTree: (DES)

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