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Stocks

Market Scramble: Chip sector rally exposes weakness in Tokyo market

TOKYO -- Semiconductor-related shares are gaining in Tokyo as investors flock to the few sectors enjoying strong earnings, but some observers are raising concerns over what they consider the start of another stock market bubble.

Screen Holdings shares hit a 19-year high Thursday before closing up 3.67% at 6,780 yen. Hitachi High-Technologies reached a new year-to-date high, then pulled back to finish at 4,030 yen, a 3.2% gain. Advantest rose 4.28% to 1,388 yen. The Nikkei Stock Average closed up 228 points at 16,693.

A similar trend can be seen around the world. Shares of U.S.-based Applied Materials have doubled in the past year, while ASML Holding in the Netherlands has surged almost 30%.

Incoming orders, a leading indicator of earnings, are strong. The value of orders at seven Japanese manufacturers of chipmaking equipment likely reached the highest in nine and a half years in the first half. Toshiba even upgraded its April-September forecast on the strong performance of its semiconductor business.

But the fact that investors are focused on such limited factors only shows how locked up the rest of the market is. "Institutional investors, who measure their performance against stock indexes, need to buy chip-related issues or they would fall behind," said Takatoshi Itoshima of Commons Asset Management. An executive at a major brokerage added: "We're buying them, but we're skeptical."

The recent trend has raised the specter of the dot-com bubble that burst in 2000. Semiconductor-related issues seem overpriced given their performance, just as information technology stocks were back then. Hitachi Kokusai Electric's price-to-book ratio is at 2.1, while Screen Holdings' is at 2.7. The majority of Tokyo-traded companies, on the other hand, have P/Bs under 1.

The industry also faces a turning point on technological advancement. Companies are currently increasing capacity in 3-D memory, which is expected to see strong demand for use in smartphones and corporate data centers but has not yet been widely applied. Samsung Electronics has announced plans to boost output by the end of the year, and Toshiba by next spring.

Some say that the gains by chip-related issues are unlike the irrational boom of the dot-com bubble. But one analyst said that in two or three years, when 3-D memory permeates the market, "the focus of competition will shift from technology to price" -- a trajectory similar to what happened in the market for dynamic random-access memory found in many computers. Indexes tracking U.S. chip-related companies are already showing signs of a lull.

Conventional market wisdom says the market sometimes rises even after it has seemingly topped out, and sometimes has gone as high as it's going to go despite expectations of further gains. The Bank of Japan continues to underpin stock prices in the country following an exodus of foreign investors. If the only industry still considered an attractive buy loses steam, the stock market as a whole will suffer.

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