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 bailed out of Nomura's stock, this is one financial firm looking strong. Like the Nikkei, Nomura has been a victim of its own success this year: With the stock's 42% year-to-date rise, a correction was bound to occur.
Mitsubishi UFJ (NYSE: MTU) also plunged in the Japanese financial sector's sell-off, with the firm's stock dropping 12.3% over the week. This firm faced more of a threat from Thursday's action, however: Japan's benchmark bond yield climbed to its highest level in more than a year, and Mitsubishi is the largest lender by assets in the country and holds more than 48 million yen in government bonds. Bond yields are still coming off of record lows, so Mitsubishi's hardly in a dangerous place. The firm's attempts to expand recently may also help boost revenue at a company that posted declining net income in its most recent quarter.
Even with the losses late in the week, not all Japanese firms suffered as badly as the financial sector. While Sony (NYSE:SONY) faced a significant sell-off on Thursday and Friday, the stock posted a huge rise on Tuesday in response to competitor Microsoft's unveiling of its Xbox One console. Sentiment was mixed regarding Microsoft's new entertainment device, causing some to wonder whether Sony's competing PlayStation 4 may have a leg up on its rival in the next generation of entertainment consoles. Sony's stock also rose in response to the company's consideration of spinning off its entertainment business to increase profit and focus more on its core electronics business, which has seen sales waver recently.