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EMERGING ECONOMIES GROW MORE ATTRACTIVE

Nikkei plunge may continue if foreign investors flee market

by Hiroko Nakata and Kanako Takahara

Market participants voiced concern Thursday that the Nikkei stock average may fall below the 13,000 line as foreign investors flee the Japanese market and shift their cash to more attractive emerging economies instead.

The 225-issue Nikkei average rose 278.94 points Thursday to close at 13,783.45 on the Tokyo Stock Exchange, recouping some of the losses of the past four trading days. The index tumbled 468.12 points Wednesday to end at its lowest level since October 2005.

“The speed of the stock fall is too fast,” lamented Haruki Takahashi, general manager of retail equities at Mitsubishi UFJ Securities Co. “The Nikkei average has dropped more than 2,000 points since the end of last year.”

Takahashi noted the average may edge down below 13,000, in which case it will be difficult to tell when stock prices will hit bottom.

Foreign investors are still the biggest buyers in the market. But they are beginning to stop investing in Japanese stocks, due partly to corporate policies, including paying low dividends, that are not shareholder-oriented based on the standards of foreign investors, Takahashi said.

In 2007, foreign investors were net buyers of ¥5.4 trillion in the three major stock exchanges of Tokyo, Osaka and Nagoya, according to TSE data.

But monthly figures show foreign investors have turned to net sellers amid the subprime housing loan crisis. For example, in July, they were net buyers of ¥813.4 billion but were net sellers of ¥337.8 billion in December.

“When foreign investors, one of the few buyers of Japanese stocks, start to sell their stocks, it affects the market,” Takahashi said, noting they are shifting their financial resources to more vigorous emerging economies.

But Kazuhiro Takahashi, who heads equity market research at Daiwa Securities SMBC, claims it is domestic investors, not foreign, who are becoming increasingly cautious in buying Japanese stocks.

“The bigger problem is rather a lack of purchases by domestic investors,” SMBC’s Takahashi said.

He said domestic investors, particularly individuals, are more cautious about buying Japanese stocks amid worries that the U.S. subprime mortgage loan problem and the yen’s appreciation against the dollar may harm the economy.

Investors have been cautious since growing interest in Japanese startup companies waned due to an accounting scandal that led to the arrest of former Livedoor Co. President Takafumi Horie in January 2006, he said.

Other analysts, however, place the blame on the domestic policies of recent administrations, which are widely considered to have backpedaled on structural reform after Junichiro Koizumi stepped down as prime minister in September 2006.

Unlike Koizumi, who championed reform, investors think Prime Minister Yasuo Fukuda lacks sufficient leadership in times of emergency — a key element that makes Japanese stocks less attractive, according to Tsuyoshi Segawa, an equity strategist at Shinko Securities Co.

Investors are particularly concerned that the government seems to lack a sense of urgency now that the subprime mortgage loan problem has escalated and hit Tokyo stocks harder, Segawa said.

Another negative factor is a possible slowdown in the domestic economy that would affect the share prices of companies dependent on domestic demand, including those in the real estate and construction sectors.

At the same time, that means exports-oriented blue chip firms, including Toyota Motor Corp., whose earnings are affected little by the weakness of the domestic economy, will remain attractive to investors, Segawa said.

Takahashi of Mitsubishi UFJ Securities said Japan’s financial sector may attract buyers once investors realize it is a good buy.

“When the global economy recovers, people will notice that Japanese financial organizations have not been damaged” from the subprime mess, unlike their counterparts overseas, Takahashi said. “That is when investors will start buying those shares.”

He pointed out that Mizuho Corporate Bank recently offered ¥130 billion to Merrill Lynch & Co., proving it has the financial strength to bail out the fund despite the subprime woes.