Dollar’s Rise Causes Concern at the Tokyo Stock Exchange

A sudden surge in the value of the dollar has thrown a wrench in the works of the mammoth money-making machine known as the Tokyo stock market.

The dollar’s strength has stoked fears of inflation, higher interest rates and of a flow of Japanese funds to dollar-denominated investments.

The dollar last week burst through the 130-yen level and is approaching the psychological point of 132 yen. It closed at 131.70 here Monday, matching its previous traded high for 1988 posted on Jan. 18.

“It looks as if the dollar will be in the 131- to 133-yen range,” said broker Norio Omachi of Sanyo Securities. “There is a question as to whether the dollar can rise to 135 yen and also when and if the Bank of Japan will come in.”

The Tokyo stock market has been declining fairly steadily since June 20 as the dollar has risen. The cumulative drop for the period was 907.45, which left the Nikkei index at 27,435.01 at Monday’s close.

Strain Profits

“There are fears of inflation, which will likely continue well into the future,” said chief fund manager Kaoru Shimura of Sumitomo Life Insurance.

A weaker yen, although helping export firms, raises the costs of Japan’s imports, especially of such basic commodities as oil, which are usually priced in dollars. That can mean higher costs for companies using imported raw materials, and a squeeze on their profits.

Although most brokers said inflation was not an immediate problem, investors have taken to the sidelines because of the possible implications of a weaker yen.

Speculation that the Bank of Japan may raise interest rates to stem possible inflation or to defend the yen has been increased by the dollar’s strength.

Higher interest rates would make equity investment less attractive compared to interest rate-related items such as bonds. Higher interest rates also could strain company profits and take some of the steam out of the economy.

Even without the possible consequences of a dollar surge, some analysts said the stock market’s position leading into late June had set the stage for a retreat.

During the first half of June, large capital shares were frantically traded, propelling the Nikkei index to a new peak of 28,342.46 points on June 17.

An arguably overheated market resulted in bloated volumes and a temporary 30-minute shortening in Tokyo Stock Exchange afternoon sessions from June 10 until June 23.

“At around 27,500, the market was technically due for a correction, and this has been a factor,” said strategist Andrew Ballingal of Barclays de Zoete Wedd Securities in Japan. “Falling volume and relative strength in smaller stocks are signs of technical weakness.”

The strength of the U.S. bond market--strength increased by the dollar’s rise--has also kept some investors at bay.

“Japanese institutions have been recently buying U.S. bonds with U.S. dollars,” said Barclays’ Ballingal. “This means less institutional money around to go into domestic equities and domestic bonds,” he said.

The strong dollar normally helps stocks of traditionally export-related companies, which price their overseas sales in dollars. But this time around, they have not noticeably benefited.

Brokers said the earlier recovery in the sector had been due in large part to increased domestic consumption after the firms adopted a more inward-looking marketing approach. This has reduced their sensitivity to exchange-rate movement, brokers said.

“A weak yen has in turn become a demerit for such industries,” said Sumitomo’s Shimura.

Volatile currency rates have recently made foreigners reluctant to buy Japanese stocks. With current yen/dollar rates, investment in U.S. equities may now seem a better bet. Bullish brokers and analysts anticipate a healthy return to Japanese equities when the foreign exchange and bond markets here calm down.

“The Tokyo market has fallen to what may be considered a good level,” said Sumitomo’s Shimura. “What we want now is for the dollar to stabilize.”