Japan: Individual Investor Margin Stampede

by: Darrel Whitten

The sudden two-day sell-off in the Tokyo market of over 1,100 points, and an apparently unrelated sell-off in New York of over 200 points are symptoms of increased volatility that portend of an interim change in market direction. The renewed rise in oil prices and continued tightening by the Fed has global investors wondering whether to scrap their bullish outlooks for 2006. Key points:

● Technically, the DJI has experienced a head-and-shoulders breakdown through its 50 day MA, while the S&P 500, the NASDAQ and the Nikkei 225 remain above technical support from moving averages.

● The sudden sell-off in the Tokyo market was triggered by the unexpected police raid of Livedoor (4753) by Tokyo prosecutors, and caused a stampede by highly leveraged individual investors. This stampede could accelerate the interim correction The Japan Investor was already expecting for the Tokyo market in Q1/Q2.

● The "mini-bubble" in speculative stocks and excessive loans to real estate development funds is actually a symptom that the BOJ's quantitative easing policy has outlived its usefulness, and it is now time for the BOJ to adopt a more normal monetary policy. While the BOJ was already widely expected to abandon quantitative easing by the spring, such symptoms of liquidity-driven excesses will help to bring the Administration around to the BOJ's way of thinking.

● The only other potential (short-term) risk investors need to be watchful of is the risk that the Livedoor and faulty condominium scandals develop into a full-blown political scandal. Here again, while any such scandal would hurt stock prices, the impact will be temporary, and at the most, only bring the Nikkei 225 down to 14,000~14,500.

● Looking past the interim correction (which we believe will not derail the secular bull market in Japan), The Japan Investor will be looking for financial, personal consumption and selected capital expenditures plays in preparation for a resumption of the secular bull market from Q2.

~ Darrel Whitten is Editor of The Japan Investor.

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