Tokyo’s Woes: How Bad Can Things Get? : Japan: Although the financial markets are volatile, land prices remain firm and the weaker yen could prove to be a boon to exporters.
Keep an eye on the fairways for a hint at where Japan’s volatile financial markets are heading. Like the proverbial canary in the coal mine, Tokyo’s speculative market in golf club memberships started losing ground last fall after soaring upward for as long as anyone can remember.
It was only a matter of time before the yen went into a slide against the dollar, government bond prices dropped through the floor and stocks dived into a tailspin that culminated in last week’s volatile and occasionally slaughterous trading.
The golf theory may seem like a far-fetched explanation of how Japan’s great bull market died, but it is as good as any circulating in Tokyo these days.
One thing is clear: After several years of incredible financial mania--when the riches of Japan’s huge trade surplus pumped rocket fuel into the value of the yen, the price of stock and land, and even the going rates for golf club memberships--market forces seem to have gone through a decisive reversal.
Following a downward spiral from the beginning of the year, stock prices plunged dramatically last Monday, when investors worried about a report in the Nihon Keizai newspaper, the leading financial daily, that Japan’s gigantic life insurance companies were preparing to sell off stocks. The Nikkei index suffered its second-worst single-day loss ever--6.6% of its value. The dollar surged against the yen, trading momentarily above the 160-yen mark.
Price movements were erratic the rest of the week, with investors getting spooked over the weakness of the yen, rumors of failing brokerages and uncertain progress in tough trade negotiations in Washington. When an interim report signaled guarded success in the Structural Impediments Initiative talks Friday morning here, the yen firmed and stocks rallied.
Yet the Nikkei’s close for the week--29,278.78 points--was still below the level of a week earlier and nearly 25% less in value than its all-time peak on Dec. 29. The dollar closed at 157.47 yen in Tokyo, nearly 10% stronger than its opening rate at the beginning of the year.
“I don’t think it’s over yet,” said a veteran foreign securities analyst in Tokyo. “I think this week we came uncomfortably close to things getting truly out of control. That’s what I told my clients, and that’s the first time I’ve said something like that in 18 years.”
What isn’t clear is whether the pessimism gripping the Tokyo stock market constitutes a genuine panic, the kind that textbooks say must follow every one of history’s financial manias. Indeed, if Tokyo’s stock prices were simply the product of a speculative bubble, and now the bubble has burst, then one might expect profound economic contractions, corporate insolvencies, bank runs and unemployment.
Don’t bet on it. Few analysts are seriously predicting that Japan’s economic growth will dip much below 4% in the new fiscal year that began a week ago. Japan’s gross national product expanded robustly in real terms by an estimated 4.6% in the previous 12 months, according to the government.
“There’s no change in economic fundamentals,” said Keiji Yasuda, general manager and chief strategist for New Japan Securities Co. “We still have one of the highest growth rates of the industrialized countries. Our interest rates are relatively low and our inflation remains under control. Japan’s industry and technology is at a very high level.”
Although it will certainly be more difficult for companies to raise funds on the stock market and new issues have been halted for the time being, Yasuda said this is not necessarily a bad thing, considering the “oversupply” of stocks. Last year, corporate Japan raised a whopping 24 trillion yen (about $152 billion at current exchange rates) through stock issues, convertible bonds and warrant bonds, he said.
“That’s half the total capitalization of the Frankfurt stock market,” Yasuda said. “It’s too big.”
Meanwhile, individual savings rates remain high, companies still hold massive internal reserves of cash, and bank borrowing is a viable alternative for financing expansion. Although interest rates are rising, they are still competitive internationally.
The price of land, used as collateral for much speculative investment in the stock market, remains firm--the latest government survey showed land prices rose by 22% last year in Tokyo, Osaka and Nagoya. And the weaker yen could prove to be a boon to exporters, whose goods will be cheaper on overseas markets.
Even golf club membership certificates, which are traded here as commodities, don’t look all that bad.
The average price of these certificates for courses across Japan was 47.18 million yen (about $300,000) on March 31, according to Nikkei Telecom, a financial data bank that monitors the golf club market. That was nearly 3% lower than a week earlier, but it was 70% higher than the level in April, 1989, and more than nine times higher than the price in 1982.
Tokyo’s exclusive Koganei Country Club retained its status of having the most expensive membership fee: 400 million yen, or about $2.5 million. That was the trading price, meaning somebody is still buying at about that level.
The Japanese madness for gorufu may differ in kind from, say, the 17th-Century Dutch mania for tulip bulbs. Golf club memberships are rooted in tangible assets of land, which without a doubt is the most scarce and precious commodity on these overcrowded islands.
And even if there are convincing arguments that Tokyo stocks are overvalued, it would be hard to establish that they have no value. Classic financial “bubbles”--like the ones associated with “Tulipmania,” or Florida swampland in 1929, or with Britain’s South Sea Co. in the early 18th Century--burst when the delusion of speculative psychology snapped and underlying assets proved to be worthless.
But Japanese companies, even bankrupt ones, would always be sitting on fortunes in real estate. The stock market may be a delusion of colossal proportions, but no one here is seriously thinking about a crash in the land market. Not yet, anyway.
“The bubble in the equity market is broken, or at least it’s spilling a lot of air,” said James E. Russell, a senior analyst with Merrill Lynch in Tokyo. “The question now is whether the real estate bubble is next, and whether this might all spill over into other global financial markets.”
