Tokyo Plunge Gives World Markets Jitters : Investment: European exchanges fall sharply. Wall Street, however, suffers relatively little.
Another massive slide in stock prices Friday on the Tokyo exchange sent financial jitters around the globe as investors reacted to the possibility of the Japanese selling their substantial international investments and thus sending stock prices into a tailspin worldwide.
But securities experts question whether the Japanese market, which has fallen 6.9% in the past week, really has that much influence on investors in the United States and other Western industrial nations.
“There may be some kind of joint knee-jerk reaction, but the long-term trends in various equity markets are really dependent on trends in the individual economies,” said Richard Bernstein, manager of quantitative analysis at Merrill Lynch in New York.
The initial reaction in many countries was substantial, however. Share prices in Britain, France, West Germany, Switzerland, South Africa and Hong Kong all fell more than 1% following the 935.87-point, or 2.6%, drop in Tokyo’s 225-share Nikkei index Friday.
The decline capped a dismal week in Japan, where the Nikkei tumbled 2,569 points to close at 34,890.97 amid worries that interest rates would continue to climb.
Stocks become less attractive when interest rates rise because investors can earn more from government bonds and bank deposits.
However, the Nikkei index’s decline had little effect in the United States, where the Dow Jones industrial index closed at 2,564.19, down only 10.58 points, or 0.4%.
U.S. market experts had been concerned that a steep decline in the Nikkei index would be echoed by the Dow for two reasons. The Tokyo Stock Exchange fell dramatically after the Wall Street crash of 1987, which was taken as a sign that in today’s global economy all stock exchanges are linked. Second, there were worries that if the Japanese exchange were to suffer a major decline, investors might be persuaded to sell their overseas holdings and reinvest at home. That could hurt both the U.S. stock and bond markets.
Although there are few recent statistics, the Japanese are believed to be substantial holders of U.S. Treasury bonds as well as corporate stocks.
If the Japanese pulled out of the bond market, it is possible that the U.S. government would have to raise interest rates in order to attract new buyers for its debt. This, in turn, would put strong downward pressure on stock prices.
“The underlying concern is that when something happens in a stock market, it frightens people, and frightened people sell stocks,” said Gail Dudack, vice president and market strategist at S. G. Warburg & Co. in New York. “If something happens to frighten people in Japan, they might sell stock all over the world.”
Last week’s trading activity did a great deal to quell those fears because the U.S. market did not react violently to the problems in Japan, analysts said.
“As the Japanese market has shown its fragility, U.S. prices have held up very well,” said Alan R. Ackerman, market strategist for Grunthal & Co. “We are not held hostage to the Japanese, but we are clearly concerned about what they do.”
Moreover, analysts maintain that the effect of the Japanese on the U.S. stock market may be less substantial than previously imagined.
Foreign investors owned only about 6.3% of U.S. companies’ stock outstanding in early 1989, Dudack said. Additionally, although the Japanese habitually snap up close to one-third of the U.S. debt sold at Treasury auctions, they also often resell the bonds, said John Hickling, portfolio manager of the Fidelity International Growth & Income Fund.
Still, investors may see further declines in both U.S. and Japanese stock prices, even though the two exchanges are clearly not trading in tandem. Both countries, after all, are experiencing some of the same woes--namely, deteriorating corporate profits and rising interest rates, Hickling said.
Japanese rates for 10-year government bonds have jumped about 1 percentage point since year-end 1989, to 6.8%, and U.S. rates have risen a similar amount and now yield about 8.5%, said Joseph Wahed, economist at Wells Fargo Bank in San Francisco.
Japanese investors fear that further increases could be in the offing since the Bank of Japan has said it intends to tighten credit in order to quell inflation, added Rod Swanson, senior economist at First Interstate Bancorp.
Meanwhile, corporate profits are suffering in both countries and are expected to remain lackluster throughout 1990.
PLUNGE IN TOKYO
Daily close of 225 stock Nikkei index Friday close: 34,890.97, down 6.9% for the week SLIDE ON WALL STREET
Daily close of Dow Jone index of 30 industrial stocks Friday close: 2,564.19, down 2.7% for the week
