Heavy selling on Friday in Tokyo almost pushed the benchmark Nikkei 225 to its lowest post-bubble close (-9.6% to 7,649 vs. 7,607 set on April 28, 2003). And that’s not all: extended trading of N225 futures in Osaka brought a record session low of 7,100, representing another 520 points to the downside. Sony (JP: 6758) (SNE: 37.58 -0.08%) is said to have ignited the fire with its downward revised earnings forecast (no surprise really, since it’s no secret consumers are hurt and corporate forex projections are far out of whack). It was downhill from there, as deleveraging really took center stage, witnessed in a surge in the yen to a 13 year high and broad indiscriminate selling of equities.

The current levels for the Nikkei and other indices and the yen are unimaginable (the smart bet was for a N225 of 20K+ not <10K to be poised for new post-bubble lows). Worse yet (or better yet if you’ve got any cash left), valuations are far below what they were at the April 2003 trough. If memory serves me correctly, the former Merrill Japan strategist Jesper Koll had thrown out a target of 28K for the N225 by the time of the Beijing Olympics!

The damage to domestic investors’ confidence is significant, and even more so now since reality has finally set in that exporters are doomed, not to mention sub-100 yen that may hit the 80-levels. Problem is there are no buyers, not of stocks and not of goods. The Japanese could do much to help their own cause, but that status-quo is entrenched.

So go figure, with the lowest interest rates in the world, Japan may now have the world’s strongest currency. Consumer and investor confidence are at the lowest of lows. The large, liquid Japanese equities market is a victim of global deleveraging, seemingly no matter how low valuations go. What is disturbing is that we may now see more failures in insurance companies, smaller banks, REITS, etc. More selling by HFs, overseas MFs, and so on, by year-end. Companies are cautious to buy back shares after having bought high in recent years. And how about the plight of workers. It has been a struggle to even receive a modest pay raise and now jobs may be in jeopardy!

We’re not exactly scared or surprised by most of these developments at this point. In some cases it may be a case of already accepting reality. In
others however, such as the latest surge in the yen, it is more troubling since it does much to keep downward pressure on equities. It will be another long and trying road to recovery. Patience, liquidity and solvency, an unlikely trio that many can boast of, are prerequisites. Otherwise, it is too easy to get burnt by the ongoing volatility (including profit-taking on rallies).