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Japan Stock Market, ETF Outlook: Is The Party Over?

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Investors should prepare for more pain from Japan's stock market, investment strategists say, in the wake of this week's massive sell-off ignited by disappointing economic data.

The slump in Japanese stocks came as the yen climbed to a four-week high. That frustrates exporters as it makes their products less competitive overseas.

"Wait for a deeper correction," Marc Faber, publisher of the Gloom, Boom & Doom Report and a contrarian investor, said in an email.

"After having rallied by 45% from the October 2012 low, Japanese stocks are due for a more meaningful correction and the yen for a rebound," Hong Kong-based Faber wrote in his April newsletter.

The Japanese stock market rallied this year as the yen depreciated on newly elected Prime Minister Shinzo Abe's pledge to stimulate the economy. Steps include public works projects and making the Bank of Japan take extraordinary measures, similar to the U.S. Federal Reserve, to stoke economic growth and inflation after decades of economic stagnation.

Rally Attempt

CurrencyShares Japanese Yen Trust ( FXY ), tracking the yen against the dollar, plunged 7.94% in the first quarter even though the BOJ hasn't actually enacted any new policies yet. But it's rallied 4% since its March 14 low.

On the stock market ,WisdomTree Japan Hedged Equity ( DXJ ) kicked off the second quarter with a 4.6% nose dive after dominating the world in the first three months of year, rallying 17%. Monday's plunge marked its largest one-day loss since August 2011. It was nearly flat Tuesday and early Wednesday.

IShares MSCI Japan Index ( EWJ ) rebounded 1.2% Tuesday after gapping down nearly 4% the prior session. It was up a fraction on Wednesday.

SPDR Russell/Nomura Small Cap Japan ( JSC ) and iSharesMSCI Japan Small Cap Index ( SCJ ) both regained about 1% Tuesday and continued higher Wednesday after diving 5% on Monday.

Not So Fast

"This does not look like a 'normal' pullback. It is too much, too quickly and has raised some red flags," Adam Grimes, chief investment officer at Waverly Advisors in Corning, N.Y., said in an email. "On the other hand, it's also too soon to say that the party is over. It is certainly possible we will see more upside in Japan, but this is likely to come only after a protracted period of consolidation."

Grimes recommends investors hold off on buying now.

"The stimulus policy that the new government is trying to implement has excited the markets, but after a relatively short period of time investors are now appropriately reviewing the evidence of whether this is a false start," Daniel Weiskopf, managing director of Forefront Global ETF Strategies in New York, said in an email.

All Eyes On BOJ Governor

He planned to watch the Bank of Japan's first policy announcement under the new governor, Haruhiko Kuroda, set for Thursday to see whether it will enact any new measures to its stimulus plans.

The bears contend Abe's stimulus plan would just add to Japan's massive debt, which amounts to 212% of the country's gross domestic product and any economic boost would be short-lived.

The Nikkei, Japan's main stock market index, is forming a topping pattern, but will likely stage one more rally after a short-term correction, says Harry Dent, founder of HS Dent, an economic research firm in Tampa, Fla.

"Trader sentiment on the Nikkei recently reached 94% bullish, higher than any time since 2008. That means it is likely heading into a top," Dent wrote in an email.

Based on multiyear chart patterns, he believes the bull run in Japan and the U.S. will end by this summer.

"I expect U.S. stocks to correct from a bit higher levels in the S&P 500 this week, with a likely 7% to 10% correction, then see a final rally to 1,600 on the S&P by this summer," he wrote. "So, I would (expect to) see something similar for Japan. This correction should deepen more into mid-May or so, then a final rally into the summer."

The quarterly Tankan survey of confidence among Japanese manufacturers improved less than expected as companies said they will cut capital spending the most since the global recession, Bloomberg reported .

Business pessimism dampened investors' expectations of economic growth as corporate spending is necessary to lift wages and growth. Follow Trang Ho on Twitter @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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