Mideast Turmoil Is Salt in Wound of Tokyo Market : Securities: Even before Iraq invaded Kuwait, fear of inflation pounded the market all year. The current woes contrast with 1987-89’s super-low interest rates and surge in stock prices.

It has been a rough year for stocks in Tokyo, and the Middle East crisis has not helped.

The current plunge in share prices, the second of the year, started even before Iraq invaded Kuwait on Aug. 2. It appears to be slowing down, but brokers agree that there is no light at the end of the tunnel yet.

Even without the Persian Gulf crisis, conditions affecting the Tokyo stock market have changed fundamentally from the 1987-’89 era of super-low interest rates and booming stocks, according to Kenji Mizutani, managing director of Tokai Bank.

Various factors--double-digit increases in the money supply, a worsening labor shortage, rising exports, record low inventories and growing backlogs of orders--have sparked worries of inflation, even though rising inflation so far has failed to emerge.

Fears of higher interest rates have also bedeviled the market all year. After the central Bank of Japan in March raised rates for the fourth time since May, 1989, concern mounted that there would be another increase.

The Iraqi invasion, and the ensuing turmoil in the world oil scene, simply has put a new damper on the market. By last Monday, the 225-stock Nikkei average hit a 1990 low of 26,176.43--down 33% from its all-time high at the end of last year.

The Nikkei average zigzagged on news from the Persian Gulf last week, while many investors and dealers enjoyed their traditional summer holiday. The Nikkei recovered Tuesday and Wednesday but then lost some of those gains Thursday and Friday, closing the week at 26,786.72.

Assurances by economists that Japan’s economy stands to lose only 0.1% of its growth this year if oil prices stabilize at $25 a barrel or lower have failed to bolster the stock market.

Even as prices fell again Thursday, the newspaper Nihon Keizai reported that a survey of major corporations showed that investments would rise 16.4%, guaranteeing a third straight year of double-digit growth in investment. Most firms, the newspaper said, already have the needed funds in hand.

Nonetheless, the Middle East crisis heated up concerns that the Bank of Japan will be forced to again raise the rate on loans that it makes to commercial banks, said Kenneth S. Courtis, senior economist for Deutsche Bank Capital Markets, Tokyo.

Weak prices of stock futures Friday doused hopes of a comeback. One broker predicted that the market would not find its bottom until the Nikkei fell to 22,000.

Tokai Bank’s Mizutani, in a column written for the newspaper Asahi, warned that “compared with European and American stocks, the prices of Japanese stocks are too high.”

He went on to say: “Expectations of capital gains that prevailed in the super-low interest era no longer exist. Other financial investments with fixed-interest returns have become more attractive. And with expectations that eventually higher interest rates will dampen economic growth, investors will be tempted to sell.”

A weakening of the yen contributed to the January-March stock plunge, and the currency skidded again right after the Iraqi invasion. But the Japanese currency, unlike the stock market, quickly started gaining value again. On Friday, in Tokyo, the yen closed at 147.35 to the dollar, compared to Monday’s 150.65 yen to the dollar.

Recognition that Japan’s economy is no longer linked directly to the price of oil, as it was in the 1970s, spurred hopes that the yen would not weaken as it did in the first two oil shocks.

If these hopes are borne out, the Japanese economy will have to cope only with a “single punch” of higher oil prices, and not the added problem of a lower yen, which would effectively raise the cost of imported oil to Japan further. Anticipation of U.S. stagflation because of higher oil costs was bolstering the yen’s value, dealers said.

Energy costs, including petroleum, account for 7.6% of the consumer price index in the United States, but only 4.7% of the index in Japan, according to the Bank of Tokyo. And although Japan has a large trade surplus to pay for the higher costs of oil, increased oil costs for the United States could worsen America’s trade imbalance, depressing the dollar.

Until the momentary decline after the Iraqi invasion of Kuwait, the yen had gained ground on the dollar because of investors’ expectations that the Federal Reserve Board would be forced to ease credit to cope with the slowdown in the American economy, said Takafumi Abe, director of the international treasury division of Mitsui Taiyo Kobe Bank.

Abe predicted that the dollar will weaken further “once market participants lose interest in the Middle East turmoil (and) the focus of trading returns to the U.S. economy.”