* Fall in Nikkei, dollar/yen viewed as necessary correction
* Abenomics magic blunted by Fed's QE tapering talk
* Analysts expect markets to stabilise soon
By Hideyuki Sano
TOKYO, June 7 The yen's rebound to two-month
highs and a rapid decline in Japanese shares are likely to be
natural, if painful, corrections after one-way market bets, but
they lay bare the risks and limits of Japanese Prime Minister
Shinzo Abe's economic policy.
The Nikkei average fell into bear market territory
on Friday from a 5-1/2-year high hit just over half a month ago,
while the yen gained more than 7 percent from 4-1/2-year lows
against the dollar to as high as 95.55 yen.
"The markets had been moving almost one-way so an adjustment
was necessary," said Seiya Nakajima, chief economist at Itochu
"But if the Fed is really tapering its quantitative easing,
then U.S. stocks will be capped and that's going to be tough for
Japanese stocks," he added.
Indeed, the Nikkei's fall and the dollar's fall against the
yen both started after Federal Reserve Chairman Ben Bernanke
said on May 22 the U.S. central bank could decide to scale back
its bond buying in the next few policy meetings.
The dollar's fall against the yen and some other currencies
is counter-intuitive, as an end of U.S. stimulus would boost
U.S. bond yields and normally lift the dollar.
But analysts said Bernanke's comments likely prompted some
hedge funds, which had been counting on a prolonged period of
cheap dollar funding, to cut their positions in many assets.
As buying in Japanese shares and selling in the yen were
among the funds' favourite trades earlier this year, those
markets were highly susceptible to corrections.
Many analysts think the dollar will stop falling against the
yen soon, given that the Bank of Japan is just two months into
its aggressive two-year stimulus plan, unlike the Fed, which
could scale back easing in a few months if the U.S. economy
shows more resiliency.
"The market had built up dollar long positions too much, so
some of them are being unwound now," said Makoto Noji, senior
strategist at SMBC Nikko Securities, noting that speculators'
dollar long positions against six major currencies were at the
highest level since 2000.
The dollar rose to a 4-1/2-year high of 103.74 yen last
month, a gain of around 20 percent since the end of 2012.
An important support level is seen at 95.40, the so-called
the cloud bottom on daily Ichimoku charts.
Still, a break there could open the way for a test of the
April low of 92.57, which means the dollar will have lost all
its gains made after the BOJ's massive bond buying programme in
"As long as that April low is not broken, we could say the
dollar's uptrend is intact in the long term. Yet, it is
difficult to expect a rally like before. We are more likely to
see range-bound trade for now," said Ayako Sera, senior market
economist at Sumitomo Mitsui Trust Bank.
In the same vein, analysts expect Japanese shares to
stabilise soon after all the stop-loss selling is completed.
In fact, the Nikkei rebounded right near its Ichimoku cloud
bottom on Friday, which was at 12,524 points. That level still
represented a 20 percent gain from the beginning of this year.
The Nikkei came under additional pressure this week from
disappointment after Abe's growth strategy unveiled on Wednesday
fell short of concrete steps, such as labour market reform or
putting more nuclear power plants online.
Bulls hope Abe is only delaying his decision until after the
July election. A victory there is paramount to Abe, whose first
term as prime minister in 2006 ended in tatters in about a year
due to his health problems and fall in popularity.
But others say the latest market upheaval shows just how
markets can become volatile when policymakers try to boost
expectations by printing money without delivering reforms - a
risk analysts said will persist.