That Was the Week That Shook--From Tokyo to Southern California : Quakes:The Japanese stock market tumbled down and an already shaky Los Angeles landscape may soon feel the aftershocks.
It wasn’t the Big One everybody feared, but last week’s quake sent pulses racing for a while; it seemed as if nothing was stable and the rumbling seemed to go on forever.
But it wasn’t the California earthquake that left a crowd of investors feeling breathless and pale; it was the financial shock in Tokyo, where stock prices fell farther and faster than at any time since the Crash of ’87.
After stabilizing briefly early in the week, the Nikkei Index headed south again on Thursday, losing more than 2% of its value, and the shock to investor confidence will not go away. The Japanese, like the Americans, now understand that stock prices can go down as well as up.
The Tokyo crash won’t be good for U.S.-Japan relations. Tokyo market observers blamed futures markets and program trading for the new volatility in the market; American pressure forced these razzle-dazzle options on the conservative Japanese financial Establishment, and foreign security firms still dominate trading in the new instruments. This spells trouble; American negotiators have a long list of more “market-opening” measures in a never-ending quest to export our own increasingly rickety financial system to the farthest corners of the Earth.
The Tokyo stock market, where stocks routinely trade at price levels many times higher than those of equivalent U.S. or European securities can command, has long been due for a correction. Insider trading and conspiracies to raise the price of favorite stocks are rampant in a country where stock tips serve as political payoffs. Foreign observers have been predicting a major correction for years, and the selloff could have been much worse. By Wall Street standards, the double-digit drop in the Japanese stock market was a relatively mild and orderly affair.
There had been some fears that a sharp drop in Tokyo would set off a global explosion like the October, 1987, stock blow-off. Indeed, the most favored apocalyptic scenarios of today usually start with the Japanese market. But the Tokyo market crashed and the world didn’t come to an end. In fact, parts of the world hardly noticed. European investors are hypnotized by the historic events in the Warsaw Pact countries and don’t much care about events in far-off Oriental bazaars. Wall Street shrugged off Tokyo, in part because nervous Japanese moved this way, getting out of their own market. Worried about a sudden weakness in the yen, they put their money into U.S. stocks and bonds.
The world may not have come to an end but Tokyo troubles will still have an impact on our side of the Pacific. The Tokyo market fell because the Bank of Japan thinks Japan’s stock and real-estate markets are dangerously inflated. Since September, interest rates in Tokyo have been climbing steeply; rates on 90-day certificates of deposit are 50% higher than they were last year, and long-term rates are higher than they have been in five years.
These rates make Japanese stocks and property less attractive to investors, but the effects don’t stop there. With super-safe 10-year Japanese government bonds offering more than 7% interest, a better rate than many American real-estate investments can show, canny Tokyo investors may lose their appetite for American property. If that should happen, then real-estate markets across the United States are headed for trouble, and the Southern California market has more to lose than most.
Five years ago, Southern California was one of a number of booming real-estate markets, but one by one the other markets have stagnated or gone downhill. In states like Texas, Colorado, Massachusetts and Arizona, only the most inept speculators could manage to lose money in real estate. Now all those markets are filled with unsalable buildings; homeowners and commercial developers are watching their equity erode; the landscape is littered with untenanted office buildings alongside savings-and-loans brought low by optimistic lending.
But in California, thanks largely to continuing Japanese interest, prices kept rising and now stand at levels substantially above those in other parts of the country. It seems unlikely that those inflated differentials can last. With both office space and housing significantly more affordable in depressed markets like Texas and Arizona, more firms are taking a second look at plans to relocate or expand in expensive California.
California and Japan have more in common than a propensity for earthquakes. Both were beneficiaries of the great bull market of the 1980s. There was a tremendous explosion of asset values in the more fortunate parts of the world over the last decade. At the height of the ‘80s, bull markets were common. The art market, junk bonds, commercial real estate--all soared. It was hard to lose money in the halcyon days of the boom.
But with the waning of the ‘80s, those markets have begun to weaken; now there are fewer pastures of plenty where the bulls roam in peace. Among the world’s stock markets, Tokyo was the last important stomping ground for the once-rampant bulls; now bears have been spotted even there.
That leaves California real estate as one of the world’s last “sure-thing” markets, and there are ominous signs that a new California earthquake--of land values, if not of the land itself--could bring the good times to a quick close. Wall Street is less than bullish about the great bear state; California’s bank stocks are down on fears of a real-estate shakeout, and analysts shake their heads over the short-term prospects of California commercial property.
More than the movies, more than defense, real estate is the industry that built Southern California and it continues to be the foundation for prosperity. In the ‘80s, real estate grew addicted to foreign capital and now faces the prospect of temporary withdrawal.
With the defense industries looking at budget cuts, and the financial system still reeling from the aftereffects of the junk bond market collapse, Southern California may be facing one of its greatest historic tests.
Those who have worried that the Japanese wanted to buy up America may now have to cope with a new and much more worrying prospect: that the Japanese might want to sell it back.
