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Stocks

Market Scramble: Small investors see BOJ's limits, turn bearish

TOKYO -- Japanese retail investors appear to be losing their optimism, with an increasing number of them coming to a view that the central bank-fueled stock rally is running out of juice.

Overseas investors, who are responsible for 70% of trading in Japanese equities, initiated the selling drive after the Bank of Japan's decision in January to push interest rates into negative territory. But now Japanese individuals, who tend to buck the trend and pick up stocks during a downturn, have become net sellers as well.

"Foreigners are eager to sell to lock in gains," Naoki Iizuka of Citigroup Global Markets Japan said. The strong yen has encouraged the move, since it has kept the Nikkei Stock Average high when denominated in the dollar or other currencies. The Nikkei climbed to a 20-year high as denominated in the pound Aug. 15, as the U.K. currency tumbled after the country voted June 23 in favor of leaving the European Union.

"Even if the yen does not appreciate further, Japanese corporate profits are projected to rise just 3-4% in the year through March 2018," Toru Ibayashi of UBS Group's wealth management unit said. This translates to "less likelihood of Japanese stocks rising sharply on earnings," Ibayashi added, listing another reason why foreigners keep on selling.

Waning confidence in central bank 

Japanese retail investors joined foreign investors, becoming net sellers in the summer.

"I don't know when it will come, but a market this unusual will end sooner or later," said Akira Katayama, an individual investor known by the screen name Gogatsu. His assets topped 10 billion yen ($98.4 million) after shares of medical device trading company Japan Lifeline skyrocketed earlier this year. "I'm building up short-selling orders on multiple stocks, and keeping my net position zero," the 34-year-old said.

Katayama, who studies the financial disclosures of listed companies to identify growth stocks, fears the Japanese market is not priced correctly. He is concerned that some growth stocks have become excessively overvalued under the central bank's monetary policy.

Investors who exited the bond market amid the BOJ's negative-rate policy have shifted their funds into equities, while the central bank has continued to buy exchange-traded funds. As a result, "the market is not working properly," Katayama said. He has been unloading shares for profit-taking, including some Hirose Tusyo shares bought when they tumbled during the Brexit-inspired selloff.

A Tokyo Financial Exchange index published twice weekly illustrates how retail investors are growing pessimistic. The net balance of long margin positions on the Nikkei Stock Average has generally declined since Jan. 6, meaning that the ranks of investors who expect the benchmark to rise have shrunk. The number sank to a 2016 low in early September. A temporary recovery later that month was due mostly to a rush of buying for the sake of pocketing dividends. Many margin traders are semiprofessional individuals.

The stock market is said to mirror the economy's performance. The Japanese market has been supported almost entirely by the central bank. Investors seem to be concluding that no matter how much the BOJ polishes the mirror, or stock prices, it alone will not improve the real economy.

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