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Japanese Financials Plunge on the Nikkei's Nightmarish Week

Dan Carroll
May 24, 2013

It's been a wild ride across the Pacific this week. China's downbeat economic data and concerns over the future of America's quantitative easing sent Asian markets into free fall on Thursday, capped off by the Nikkei's (NIKKEIINDICES: ^NI225) 7.3% plunge that day alone. Japan's leading index clawed back some of its losses Friday to end the week down 3.5%, but the loss was a reminder of just how young and fragile the Japanese market's recovery is. Investors have thrived so far under Prime Minister Shinzo Abe's easy-money plan, but one dose of fear this week sent the market into turmoil.

A temporary adjustment to the year's big gains
Much of Thursday's gains were due to investors looking to cash out on Japan's rise as the first hints of doubt arose in the markets. The Nikkei has risen more than 40% year to date, far outpacing other markets around the globe, and it's only natural for a correction to set in after such a swift rise. Japan's government certainly thought so, with Cabinet Office Senior Vice President Yasutoshi Nishimura calling the dip a "temporary adjustment" when speaking to Reuters.

Don't let Thursday's downturn alter your investment thesis significantly. While China's manufacturing data may have disappointed, the weak yen should continue to fuel Japanese exports, even if Chinese growth continues to slow. While investors panicked about America's stimulus potentially slowing this year, there are no signs of Japan's easy-money atmosphere ending: With Abe angling for 2% inflation and the Bank of Japan set out to double the country's money supply, expect stimulus to dominate Japan's near future. The Japanese economy has already responded well, posting 3.5% annualized growth in the first quarter.

Japan still has a long way to go before it reaches steady growth after decades of stagnation. Consumer prices are also rising due to aggressive easing, which could hurt consumption in the long run despite a 5.5% year-over-year increase in spending per household in March. Still, aggressive easing should continue to keep interest rates low and promote investment, which indicates that the best could be yet to come for investors.

The best certainly hasn't come this week in the financial sector, however. Financial stocks have surged in Japan on stimulus optimism, but fears over its future have blasted this sector's best over the last five days. Nomura Holdings (NYSE: NMR), one of the biggest victims of investor fear, fell 11.5% over the course of the week. Nomura has done well lately on the back of easy money and is preparing to increase sales staff in Europe, Asia, and the Americas to boost profitability overseas. While investors have panicked over Thursday's drop and