Japanese stocks seem to be holding up decently in light of another securities law violation that has the potential to once again roil the market and prompt massive selling. The insider-trading culprit is the love-him or hate-him activist investor Yoshiaki Murakami (pictured on the left), a former bureaucrat and soon-to-be former manager of MAC Asset Management fund (widely known as the Murakami Fund). Murakami has had a Warren Buffett-like following in which the media and investors follow his every stock investment.
It is unfortunate that Murakami got involved in this in the first place and just goes to show you what happens when you have enemies in government. The firm that he was illegally selling shares to (livedoor co.) faced its own securities violations that threw Japanese equities into a downward spiral in the latter half of this past January. Takafumi Horie, the former president of livedoor and also a love-him or hate-him hot shot is allegedly guilty of far worse crimes in my opinion, having falsified financial information and engaged in fake transactions. Horie had been a champion of growth by M&A and it was feared at the time of his firm's scandal that M&A would be hurt and as a result have a far reaching negative impact on the Japanese economy. That hasn't happened but the securities watch dogs in Japan have clearly been on the hunt for blood and who knows what's next.
The loss of Murakami is far worse for Japan than the loss of "Horiemon" (popular nickname of Horie). This time around the M&A playing field could become a sparse one that investors and firms shy away from as they worry not only about innocuous trading but also even coming ever so slightly under the scrutiny of the government. Murakami has already admitted he engaged in insider trading, although he says did so unknowingly at the time. Admission of guilt is something Horiemon has yet to do. Murakami has done a lot for Japanese shareholders and it will be hard to replace the outspoken capitalist that wasn't afraid of making money but slipped up in a stupid deal.
The Nikkei 225 Stock Average lost 0.77% today after having rebounded 1.84% on Friday on a trading day that I thought marked the end of the Nikkei's slump despite the word of Murakami's insider trading. This is nothing near the 6.8% 3-day tumble following allegations of livedoor's violations in January. I don't expect to see any major selling tomorrow based on the Murakami case, although there could be sellers based on other reasons such as today's losses which I blame mostly on forex movement and NASDAQ futures.
One might be concerned Japanese stocks could be sent even further into the red for the year. However, I believe given the recent market weakness and the fact that the Nikkei is negative year-to-date that the downside potential is very limited and blue chips will lead a rally in the short-term. Any rally could take off if the Fed decides to push pause and let the bulls enjoy the summer.
Do beware of shares of ORIX Corp (NYSE:IX) which have an equity relationship with the Murakami Fund. ORIX ADRs plummeted 6.77% on Friday. Overnight ORIX ordinary shares (Tokyo: 8591) gained 3.12% after having tanked on Friday. Volume on its ADRs is thin so potential volatility may be difficult to trade. Japan-related mutual fund holders could suffer if ORIX were to trade substantially lower given the firm's popularity among fund managers.
The overnight losses in Japan could mean flat trading or even minimal gains for investors of Japanese ETFs, CEFs, and some ADRs because of the stronger yen against the dollar.
iShares MSCI Japan Index ETF (NYSEARCA:EWJ) 1-yr chart: