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Wild swings in markets fuel anxiety of Japanese

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Mika Tanabe, a new investor in the Japanese stock market, has been on a stomach-turning roller-coaster ride. Since March, her shares in Softmax, an electronic medical records company, have slumped 30 percent, surged 120 percent, lost half their value, then climbed 20 percent again.

She watched in bewilderment as Softmax shares plummeted as much as 25 percent in just one day. Her friends had warned her, Ms. Tanabe said, that playing with stocks was playing with fire.

"They said investing is so risky, so dangerous. It's what many people think," said Ms. Tanabe, who is 26. She listens to them and then rationalizes it. "I tell myself that stocks are going to rise in the long run."

The wild ride in Japanese equities this year has been driven by the hopes and fears accompanying the bold economic policies of Prime Minister Shinzo Abe. The country's economy, after decades of doldrums, appears to be re-energized. Mr. Abe's success in the Japanese parliamentary elections last Sunday affirmed the policies, even if the statistics are not always encouraging. It has reinvigorated an interest in investing, some brokers here said, that brings flashbacks of Japan's spectacular bubble era of the late 1980s.

(Read more: At least, inflation in Japan is speeding up)

After a giddy 80 percent ascent over six months, the Nikkei 225 stock index turned sharply southward in mid-May and all the horrors of Japan's historic bubble burst seemed to return. In a matter of days, stock market commentators went from hailing the "rally of the century" to cautioning that stock markets were a dangerous money-sink in which no casual investor could hope to thrive.

"Market terror! Amateur investors, get out now!" screamed a headline on the cover of the popular weekly magazine Shukan Gendai after a particularly bad run last month.

The volatility continued on Friday as the Nikkei stock index fell almost 3 percent after news that Japanese consumer prices rose in June to their highest annual pace in nearly five years.

The question market watchers are asking remains: Can Japan's retail investors get over a deeply entrenched suspicion of the stock market made worse by recent volatility?

"Japanese still think of the stock market as a place where people, blinded by greed, manipulate prices based on some sort of voodoo magic," said Ryoji Musha, president of Musha Research, a private financial research firm based in Tokyo, and former chief investment adviser at Deutsche Securities in Japan.

(Read more: Here's when to get out of the Nikkei rally)

The continued wariness casts a cloud on the long-term strength of Japanese stocks, even as individual investors are crucial to sustaining a recovery, experts say. Fear of stock markets also limits the broader effect of the wealth generated so far by Mr. Abe's economic policies, because too few ordinary Japanese stand to benefit directly from stock market gains. And it undermines efforts by Mr. Abe to shift the trillions of yen sitting in low-yielding savings accounts in Japan toward more productive investments.

"Any long-term market recovery hinges on the support of individual investors," said Masayuki Doshida, senior market analyst at Rakuten Securities, an online retail brokerage firm. He said that some individual investors had bought stocks on margin, or borrowed money from brokers to pay for their stock purchase. But once those stocks fell past a certain value, many investors were forced to sell their shares, worsening the market fall.

"But I'm optimistic. I'm waiting for investors to regain their nerve and jump back in," Mr. Doshida said.

The Japanese remain some of the most cautious investors in the industrialized world. Stocks and mutual funds together made up just 11 percent of financial assets held by individuals in Japan at the end of last year. That is less than half the levels seen in 1990 near the bubble's peak, and far below the current 45 percent in the United States and 22 percent in the euro zone, according to figures from the Bank of Japan.

(Read more: Nikkei will surge to 20,000: Top asset manager)

Japanese households instead hold 55 percent of their financial assets as cash and savings, despite near-zero interest rates. At the peak of the bubble, Japanese savers stashed only 40 percent of their assets there. The comparable rate is about 15 percent in the United States and 36 percent in Europe.

In the bubble years, novice investors followed Japanese corporations in taking up zaiteku, a Japanized abbreviation of investment technology, or the art of speculative investment in stocks, bonds and real estate. Neighborhood stockbrokers popped up across Japan.

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The 1987 listing of Nippon Telegraph and Technology, the former state-run telecommunications company, drew such investor enthusiasm that its share price almost tripled in the first two months of trading, briefly making it the world's most valuable company by market capitalization.

Legends were born. Nui Onoue, a bar hostess in Osaka, earned a reputation for getting stock tips through divine guidance and became one of Japan's most active individual investors, controlling billions of yen in investments. Self-made billionaires like Kazuo Kengaku earned notoriety as "shite" (pronounced she-tay) or market movers who reaped hefty profits by driving stock prices up and down.

Then things starting going awry. By 1992, N.T.T. shares had lost four-fifths of their value, wiping out investors across Japan. Ms. Onoue was arrested in a $2.5 billion fraud scandal. Mr. Kengaku ran into trouble with his gangster associates, and his body was discovered encased in concrete in a forest in Kyoto.

(Read more: Japan PM Abe's mandate is much smaller than it looks)

"The excesses of the bubble era gave stocks a dirty image," said Sumio Mochizuki, who runs Icas, a nonprofit company that is trying to popularize investment clubs in Japan. "Even if you're just getting together to trade shares, some people suspect you're up to no good, or that you're a criminal group," he said.

But as markets surged in 2013, "semiprofessional" day traders and Japan's wealthy seized the market upside and made some serious money, according to an analysis by Sumitomo Mitsui Trust Bank.

The fervor later spread as mom-and-pop investors who had watched nervously from the sidelines raced to the market. Suddenly, a proliferation of investment guidebooks hit bookstores: "Get rich with Abenomics," one advertised on its cover. "It's true: You can make money off stocks!" gushed another.

Soon, brokerage firms said they were inundated with applications for new accounts and attendance at investment seminars ballooned. In late May, Daiwa Securities, one of Japan's biggest investment banks, said it would increase its sales force by about 50 percent to handle the renewed interest in stocks.

"It's incredible. For a while, I didn't know anything but a bull market," said Mirei Tsugawa, 33, a novice investor who works at Narita Airport in Tokyo. "I didn't tell my parents what I was doing, though, because they'd be worried."

Perhaps for good reason. On May 23, the rally came to an abrupt halt. The market plunged 7 percent in a single trading session as foreign investors were unnerved by signs of a manufacturing slowdown in China and concerns over an early end to monetary stimulus in the United States.

(Read more: More bad news for China? Factory profit growth eases)

"Individual investors suddenly felt like they were sheep about to be gobbled up by hedge fund wolves," said Shinichi Watanabe, a professor in finance and economics at Tokyo International University and a former fund manager at the Sumitomo Trust and Banking.

A shift from saving to investment is a critical part of Mr. Abe's reforms. Next year, Japan is set to introduce tax-exempt individual accounts for stocks and mutual funds. Nomura Asset Management recently predicted that nearly 10 million people might use such accounts, generating a 26 trillion yen inflow into shares and investment trusts.

The drive has plenty of skeptics, however.

"Stock markets today are just a money game," said Mitsuru Sakurai, policy chief and lawmaker at the opposition Democratic Party. "Prime Minister Abe is creating a dangerous bubble, and we all know what happens to bubbles."

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