Japanese Investors Begin to Counter
Foreign, Prop Desk Selling   

• The Nikkei 225 snapped back 29% from lows on October 27 to October 30 before giving back some 450 points on Friday of last week. Helping to support Tokyo stocks were one of the most severely over-sold positions on record, US rate cuts, a waffling back from JPY90/USD near JPY100/USD, and a headline JPY27 stimulus package announced by the Aso Taro administration, even though the BOJ disappointed with just a 0.20 point cut in rates.
• Over the last available two weeks (to October 24), foreign investors were net sellers by JPY855.0 billion and broker prop desks dumped a net JPY1,086.4 billion of Japanese stocks. As we pointed out last week, however, a lot of very good Japanese companies are being thrown out with the wash. This is being recognized by domestic individuals and pension funds who are buying through the trust banks. Together, they were net buyers by JPY1,111.7 trillion.
• While the bear market in Japanese stocks is still growling and mauling, we believe that domestic investors have begun to take a longer-term view of historically low market valuations, and are liking what they see.
• The forward P/E multiple at 8X~9X versus the historical P/E multiple indicates stock prices are already discounting over 50% peak-to-trough declines in Japanese profits, whereas the longest draught in corporate profit growth was between 1990 and 1994, when profits declined 62% peak-to-trough as Japan faced its own financial system meltdown.
• This suggests that a lot of what investors fear is around the corner has already been baked in stock prices. On the other hand, since Japanese individual investors have a very good track record of being large net buyers in the week that stock prices bottom, their net buying is an encouraging sign.
• Moreover, our back-of ?the envelope calculations of the negative impact of the strong yen versus the positive impact of plunging imported commodity prices suggests the combination of the two will be largely a wash for Japan’s economy.

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