Volatility Takes Over the Nikkei


Market fears walloped Japanese stocks on Thursday, taking down the Nikkei again as part of a bear run over the past month. Despite that, however, the Nikkei managed to stave off a more serious weeklong loss, shedding just 1.5% over the past five days as a nearly 2% gain on Friday eased investor pain. The index has crashed over the past month, but should you be concerned about the state of Japan's markets? Let's take a look at what's happening across the Pacific.

A case of the jitters
If you want a comparison of why Japan's Nikkei has risen and fallen so dramatically over the past few months, look no further than America's leading stock indexes. The S&P 500 has swung wildly over the recent month as investors have torn their hair out over quantitative easing. Will Fed Chairman Ben Bernanke taper off bond buying? Will stimulus continue at its current pace? Even though the economy is still far away from a complete recovery and quantitative easing looks to continue for some time -- tapering or no -- investors have sent the markets flying up and down over the slightest bit of news. That's volatility in a nutshell, and it ignores any semblance of a rational long-term outlook as Wall Street has grasped the smallest tidbits of news and ran with them.

Translate that to Japan's markets, where Prime Minister Shinzo Abe is launching the mother of all quantitative easing movements that aims to double the country's monetary supply and boost inflation to 2% after two decades of stagnancy. It's volatility on steroids.

There are reasons to be wary of Japan's rise, certainly. Any rise from interest rates could make the country's substantial public debt all the harder to service. Strengthening from the yen will also hammer leading export stocks that look to rely on a weak currency to boost profit.

Nonetheless, Japan's stimulus isn't a short-term blast that should frighten investors like it has. It's a long-term movement to restore a health economic climate the country, and the small nuances of an unpredictable market are no reason to panic. The Nikkei's early year gains probably won't be back at that level, but if "Abe-nomics" continues successfully and further weakens the yen while growing the money supply, Japan's stocks should thrive.

Japan's leading financial firms haven't abandoned the stimulus ship just yet, at least. Nomura Holdings broke ranks from the irrational panic when it raised its target for the Nikkei to 18,000 by the end of the year. That represents a sharp gain for the index, which currently sits at just above 12,600. That'd help out Nomura as well, which has targeted a number of leading Japanese firms as buys that stand to benefit from Tokyo's growth-oriented moves. Nomura's own asset management branch posted a 16% year-over-year revenue gain last year, and a strong rebound from the Nikkei would help the company move even higher this year.

Many banks aren't so optimistic about how Japan's stimulus will impact their finances, however. Sumitomo Mitsui , Japan's third-largest bank, projected in May that its net income will fall by 27% this year, a sharp fall after last year posting a 53% gain in net profit. With interest rates low, lending looks to become less profitable at the country's leading financial firms. Sumitomo has also reduced its exposure to bonds while moving money into stocks and similar assets, a plan that began last year and likely will pay off for Sumitomo in the future.

Not all banks are downbeat on bonds, however. Mitsubishi UFJ Financial has the country's largest portfolio of government bonds, holding more than 48 trillion yen's worth, and has indicated that it's not looking to spark a sell-off in bonds anytime soon. Like Sumitomo, however, Mitsubishi UFJ isn't optimistic about this year's forecast: The company projects its net profit will fall 11% this year after slipping 13% last year.

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