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Expectations for 'Serious' Decline in Japanese Shares Overblown, Says Nomura

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Economists are scrambling to assess the costs of the devastating earthquake and tsunami in Japan, but investors are already making their own decisions as Japanese equities have come under dramatic pressure.

Japan's Nikkei-225 was down 6.18% today, and the iShares MSCI ETF that tracks the Japanese market (EWJ) is down even more at 9.07%.

If the ETF were to close at its current level, notes Bespoke Investment Group, it would be its second biggest one-day decline since it began trading in the mid-90s. (The biggest decline ever for EWJ came on October 15th, 2008 when it fell 10.41%).

The analysts at Bespoke put together a table showing all one-day declines of 5% or more for EWJ throughout its trading history. While the circumstances surrounding today's move lower in Japanese equities are unlike the circumstances surrounding any of the other days listed, they emphasize, the ETF has historically bounced back on the following day with an average change of 2.47%. The ETF moved higher by at least 4% on the day after the prior four biggest one-day declines.

“Let's hope we get a repeat pattern this time around as well,” says Bespoke.

Analysts at Nomura -- which is the largest Japanese investment bank -- expect this earthquake to provide further impetus to the correction in Japanese equities that has been occurring since mid-February. However, they don’t envision a serious correction for three reasons.

First, they say, industrial production only fell in the immediate month following the Kobe earthquake (1995). Second, the government is likely to provide fiscal support to the regions affected. Third, the analysts see little risk that the earthquake will trigger a sharp rise in the value of the yen.

The analysts told their clients that they expect the following sectors to perform relatively well as they are more likely to benefit from reconstruction demand: construction, metal products (including bridges, construction materials, housing equipment), glass & ceramics products.
POSITION:  No positions in stocks mentioned.