Japan: Where is the Growth Vision?    

• The long-awaited correction is upon us. All major US indices and the majority of the global equity indices have dropped below their 50d moving averages. Gold, crude oil, industrial metals and agricultural commodities have faired better, but they are also seeing profit taking.   
• For the time being, it's a rallying USD against virtually everything else. A 50% surge in a matter of days in the VIX S&P 500 volatility index suggests this selloff has investors steeling for more downside than any correction to date.
• The breakdown below 50 day MAs suggests more than a couple of bad trading sessions, but we believe that global financial markets will continue to be supported by excess liquidity as long as the Fed keeps its foot on the accelerator. By the same token, the USD will remain under pressure until the Fed takes away the excess liquidity punch bowl.
• Upside sustainability for Japan's Nikkei 225 is looking even more iffy than the S&P 500 due to a number of domestic issues Japan is facing. The rally in Japan's stocks peaked in late August just as the DPJ was being given the reigns of power. Since then, investors and the voting public have become increasingly concerned about the impact of Hatoyama Administration's policies on economic growth and the ballooning national deficit. At the same time, the BOJ is becoming increasingly concerned about deepening deflation caused by a persistent demand-supply gap.
• Deflation is a significant factor in the yen's appreciation, and as the stocks of Japan's currency sensitive exporters react real time to moves in JPY, a break above JPY88/USD could be the trigger for a significant sell-off in electronics and automobile stocks, especially if global equity markets continue consolidating.
• The rally to date in Japan's benchmark equity indices has been quite narrow, and dependent on the very sectors that would see selling pressure as the yen appreciates. Japan's financials also have their own set of problems, particularly the need to procure a significant amount of new capital to meet more stringent capital ratios. Thus Japanese equities began to correct first and could see relatively more downside in the selloff.

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