Japan’s underpinnings

24Jan06

William Pesek Jr.at Bloomberg.com calls into question the potential for the Japanese economy. Given the problems exposed in the Japanese stock market by the Livedoor scandal and the poor performance of the Tokyo stock market. Despite the return of economic growth Pesek is skeptical of the economy’s underpinnings.

Economies are only as strong as their weakest links. While employment and incomes are rising in Japan, the financial infrastructure is proving underdeveloped. That could undermine Japan at a time when stock markets are playing an unprecedented role in economies.

The question is whether this incident will have any substantive effect on the business environment in Japan. Pesek is skeptical the Livedoor incident will have such an impact.

Yuka Hayashi in the Wall Street Journal notes the Livedoor debacle has had a deleterious effect on a number of Japan-focused mutual funds. The liquidity of Livedoor stock supposedly enticed a number of managers to invest in the stock.

Analysts say Livedoor was among the few Japanese stocks sought by small-cap and midcap funds with large assets. That’s because the popularity of the stock among Japan’s individual investors boosted its liquidity, making it easy for fund managers to go in and out of the stock unnoticed. Furthermore, repeated stock splits sharply increased the number of company shares and their liquidity.

Since a number of Japan-focused mutual funds were affected by Livedoor, maybe it is time to look some alternatives. Investors still interested in the Japanese stock market do have the option of purchasing the iShares MSCI Japan (EWJ) fund. Gregg Greenberg at TheStreet.com notes this fund is focused on large cap stocks and has little in the way of Internet investments.

That is not to say that Japan is out of the woods. The Japanese stock market has been the beneficiary of significant capital inflows. The question is whether this hot money will stick with the Japanese market. The question is still unanswered.

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