Prices on the Tokyo Stock Exchange declined sharply Wednesday for the third consecutive day, continuing a plunge that has cut 6.6% from a key market index.
A minor rally took place in the morning, but those gains were quickly erased, indicating that investor confidence had not returned after Tuesday's record decline. The Nikkei index of 225 key stocks fell 126.57 points on Wednesday, closing at 17,336.62. The index had declined by 637.33 points on Tuesday, the worst single-day loss in the history of the Tokyo exchange.
"Investors put their toes in the water in the morning," a trader working for an American brokerage house said Wednesday, "but they were not satisfied that the market had corrected itself yet."
The index stood about 100 points above Tuesday's closing figure at 2 p.m. Wednesday, but it plunged 226 points in the final 30 minutes of trading.
Triggered by New York
The market began its slide on Friday, falling 460.73 points in response to last Thursday's 86-point plunge in the Dow Jones industrial average in New York. The Tokyo market was closed Monday, a national holiday.
Although analysts in Tokyo agreed that the declines in Tokyo were triggered by events in New York, they said the plunge in Tokyo was a correction to "overheating" caused by a combination of factors, including declining interest rates and the growing relative value of Japan's yen currency.
The dollar had declined to about 150 yen in recent weeks from 242 at this time last year. It closed Wednesday at 155.95 yen in Tokyo and 154.95 in New York.
The dollar's drop was engineered last September by finance ministers of the so-called Group of Five--the United States, Japan, Britain, West Germany and France. They acted in response to U.S. concern that the dollar's high value was curtailing the attractiveness of U.S. exports overseas and, conversely, that the relatively low value of other currencies, mainly the yen, was encouraging a flood of imports into the United States.
As a result, Japan's export earnings are down, and the decline has forced Japan's huge export-oriented corporations, such as Toyota, Sony and Hitachi, to hold the line on plant investment and to plow their profits into the stock market for quick yen-denominated returns.
"People have been putting money into the market instead of investing in equipment," said Ed Merner, an analyst at Schroders Ltd., a British investment bank. "It's been a trader's market."
Activity on the Tokyo Stock Exchange has become so hectic this year that trading volume has surpassed the 2-billion-share level on several days, something that had never happened before. The billion-share level was broken only last year. Last Thursday, the day before the exchange started its plunge, 1.2 billion shares were traded. Activity was thin Wednesday, with 550 million shares changing hands.
"The one thing the big Japanese institutions were convinced of was that the yen would move up further against the dollar and that the Japanese stock market was in the short term a better place to put one's money than the United States," said Bill Arah, an analyst at the Tokyo office of the Wall Street firm of Goldman, Sachs.
Arah emphasized that the Japanese government has been concerned by the overheating of the stock market and recently attempted to take measures to ease pressure on equity. It relaxed foreign exchange controls in an effort to divert money into overseas investments and temporarily raised short-term interest rates, encouraging investment in bonds. The intention was to siphon capital away from equities, he said.
But, he said, "the option to push up short-term interest rates . . . was not open to the Japanese, who were under pressure from the United States to lower interest rates." The easing of foreign exchange restrictions also had little effect on a market into which large corporations were pouring massive amounts of funds daily. According to analysts, as much as 70% of the trading was concentrated on 10 to 20 leading issues, which were the only ones with the share volume to absorb the money being moved into the market.
It was the failure of the Japanese and the West Germans to respond to U.S. prodding to lower interest rates that caused investors on Wall Street to conclude last week that higher interest rates might return. The higher rates, it was feared, would attract money away from stocks into bonds, causing share prices to drop.
Overheating in the Japanese stock market has been one reason why Japanese authorities have resisted U.S. pressure to lower interest rates.
The governor of the Bank of Japan, Satoshi Sumita, was quoted Wednesday as saying that at a meeting of top-level financial officials later this month in Washington, he will continue to resist U.S. demands to lower the Japanese discount rate.