The Nikkei average ended 2007 with a loss for the year of 11 percent on Friday, its first fall in five years and making Tokyo the world's worst-performing major stock market.
The market reached its high for the year in February but was overshadowed by booming markets and vibrant economies elsewhere in Asia and in recent months has been dogged by the US subprime problems and resultant credit crunch.
The year's final trading day in Friday saw exporters such as Canon Inc among the main drags on the market, with investors discouraged by a firmer yen and worries about the subprime issues and the US economy's outlook. "The market ended as if to symbolise the year's trade - subprime," said Hitoshi Yamamoto, chief executive officer at Fortis Asset Management Japan.
"This looks like a warning by the market that the subprime problem will continue into the new year and won't be solved easily." Tokyo stocks also fell out of favour because foreign investors were disappointed by Japanese firms' mindset such as a willingness to adopt anti-take-over measures and the government's slowness in implementing structural reforms, Yamamoto said.
In 2006 the benchmark Nikkei gained 6.9 percent, boosted by expectations of mergers and acquisitions among Japanese firms. It finished Friday's half-day session down 1.7 percent or 256.91 points at 15,307.78.
The broader TOPIX index ended Friday down 1.6 percent or 24.26 points at 1,475.68, booking a decline of 12.2 percent for the year - also the first drop in five years. Start-up markets fared worse. The small-cap Jasdaq market finished the year down 18.6 percent while the Mothers market for start-ups lost nearly 30 percent and the Hercules Index shed 34.6 percent.
In contrast, Hong Kong's Hang Seng Index rose about 40 percent, while the US Standard & Poor's 500 gained 4 percent and the pan-European FTSEurofirst 300 added about 2 percent. The Tokyo market is closed until January 4, when it will start 2008 with a half-day of trade. Full trade resumes on January 7.
SUBPRIME AND BEYOND: Banks shares were among the worst performers in 2007 due to a credit crunch stemming from the subprime problems. Japan's top bank Mitsubishi UFJ Financial Group lost nearly 30 percent during the year, but trading houses such as Mitsui Co Ltd and shipping firms fared better, helped by robust demand from emerging economies.
Mitsui shares rose 33 percent during the year. The biggest percentage gainer among large-cap stocks was Nintendo Co Ltd, which powered 120 percent higher on red-hot demand for its Wii and DS game machines. Soichiro Monji, chief strategist in the equity management department at Daiwa SB Investments, said bank shares could regain popularity in 2008 as they had been oversold despite their small exposure to subprime problems.
"Investors could generally turn to domestic demand-reliant shares such as retailers and banks because there are worries about the situation overseas and the yen could further strengthen," he said.
Monji said the worst of the subprime problems will likely end in January-March and the Nikkei could recover ground somewhat, though concerns about Japan's economic health remain. "Still, there's a possibility investors will fall in love with Japanese stocks again as other Asian markets, particularly China and Hong Kong, could lose ground after the (Beijing) Olympics," he said.
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