Japanese equities declined as the US financial crisis deepened, offering clear signs of a global economic slowdown. Commodities and emerging-market related shares fell sharply, while defensives and domestic demand-oriented stocks outperformed. The only sectors which did not decline, in local terms, were rubber, and pulp & paper, which are seen to be beneficiaries of lower raw material prices.The BlackRock Japan Fund (down 15.5% in sterling terms) underperformed its benchmark (down 7.4%) over the quarter as a whole. As market sentiment shifted from emerging market domestic growth to "decouple" from the US, to a synchronized global slowdown, we saw severe corrections in commodities and emerging market related sectors.Although we significantly reduced larger-than-benchmark exposures to those sectors, weak performances from Marubeni and Mitsubishi Corp (wholesale), Isuzu Motors, and Komatsu (machinery) impacted returns. In activity, we have significantly reduced our commodities exposure and hold only small sector and theme bets, reducing the overall risk of the portfolio. We have completely sold out from Suzuki Motor, Mitsui &Co (wholesale) and Makita (machinery).In addition, as we expect demand for semi-conductors to be weak, we completely sold out of our Toshiba position and trimmed Elpida Memory. Despite the relative stability of the economy and the banking sector in Japan, near-term price fluctuations are likely to mirror global market developments. We maintain modest overweights in insurance and construction, while underweighting sectors such as electric appliances and machinery.
