Japan's Topix May Drop 16% to 950, Nomura, CLSA Say

By Patrick Rial and Toshiro Hasegawa

Sept. 30 (Bloomberg) -- Japan's Topix stock index may plunge 16 percent below yesterday's close, to the lowest since August 2003, after U.S. lawmakers rejected a $700 billion bank- rescue plan, Nomura Holdings Inc. and CLSA Ltd. said.

The gauge may drop below 950 points, Seiichiro Iwasawa, Nomura's chief strategist in Tokyo, wrote in a note to clients today. The measure closed at 1,127.87 yesterday. Jolyon Montague, chief equity strategist in Tokyo for CLSA, agreed with the target, a level that would bring shares in line with book value.

``You'll see a bit of extreme Armageddon in the next couple of days, but after that we'll be fine,'' Montague said in an interview today, advising clients to switch from ``defensive'' stocks to ``high-quality'' companies such as Canon Inc., the world's largest digital camera maker, after such a plunge.

The U.S. House of Representatives yesterday rejected the rescue plan, sending the Standard & Poor's 500 Index to its worst slide since the 1987 ``Black Monday'' market crash. Congress will reconvene on Thursday, Oct. 2 and attempt to reach a deal on a package, U.S. House Majority Leader Steny Hoyer said.

``The voting down of the relief package means that risks to the financial system have intensified,'' Nomura's Iwasawa said in his note. ``Financial markets are breaking into crisis mode. There were hopes that the government would move swiftly to deal with the problem, but it's not happening.''

Book Value

The Topix slumped 4.6 percent to 1,076.57 as of the 11 a.m. break in Tokyo, while the Nikkei 225 Stock Average lost 4.6 percent to 11,199.07. The Nikkei may slip under 10,000, 15 percent less than yesterday's close, Nomura's Iwasawa said.

The Topix currently trades at 1.25 times book value, or the net value of assets minus debt. The Topix fell to as low as 1.18 times book in March 2003, when the gauge marked the bottom of a 12-year downward slide.

``Around 950 or so implies the market is on one times book,'' CLSA's Montague said. ``I really don't see the Japanese equity market going significantly below that and any time spent down there will be really brief.''

Investors should take that opportunity to buy into beaten- down shares as the eventual approval of financial relief measures means those levels will be temporary, he said.

``If you're a Congressman you're going to reconsider your vote strongly when you meet to discuss the package on Thursday,'' Montague said.

Opportunities

The failure of U.S. lawmakers to pass a bank rescue plan would provide opportunities for Japan's financial companies to acquire U.S. lenders as they collapse, Montague said.

Mitsubishi UFJ Financial Group Inc. agreed to spend $9 billion for a 21 percent stake in Morgan Stanley yesterday. Meanwhile, Nomura snapped up the European, Asian and Middle Eastern operations of bankrupt Lehman Brothers Holdings Inc. last week, extending the global reach of Japan's largest brokerage.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net