Partial Recovery for Tokyo Stocks

Japanese stocks recovered somewhat this morning after giving investors a scare Monday by falling 1.9% to their lowest level since October, 1990. But analysts--noting weakness in the Japanese economy--were pessimistic about prospects for a further recovery in the short term.

With corporations unloading shares and switching to cash in an effort to dress up their earnings reports for the fiscal year that ends March 31, market experts said the market could continue to test new lows in the coming months.

Senior executives of Japan’s four large brokerage houses were scheduled to meet this morning to hammer out a joint position to present to the Japanese government on what should be done about the market’s malaise.

“The next two months will be the toughest period,” said Kosaka Uano, head of research for New Japan Securities.

The 407.55-point drop in the Nikkei index Monday to 20,913 was particularly damaging, Uano said, because it ripped through the 21,000 barrier many had expected to hold as a bottom.

“Once it went through the 21,000-level, the Japanese assumed it would fall to 20,000,” said Paul Migliorato, a broker at Jardine Fleming Securities. “They were paralyzed.”

Although the market did mount a minor rally this morning, climbing 120.75 points to close the day’s early session at 21,034.57, brokers said the recovery was feeble in view of the strengthening yen and falling interest rates--conditions that normally give the market a powerful boost.

“The traditional factors are not working,” Migliorato said.

The market is down sharply--more than 45%--from its high of 38,915.87 in December, 1989. An equivalent plunge on the New York Stock Exchange would drop the Dow Jones industrial average to 1,760, a level the U.S. market has not seen since the October, 1987, crash.

But stock analysts in Tokyo differ over whether share prices are cheap at current levels.

Keikichi Honda, president of BOT Research International, suggested that 21,000 is a fair level for share prices and that a further sharp drop is unlikely.

However, Kenneth Courtis, economist at Deutsche Bank Capital Markets (Asia), predicted that the Nikkei index could fall to the 17,000 to 19,000 range before climbing again.

Brokers said the biggest downward pressure on stocks is coming from corporations that are selling some of their large equity holdings in an effort to dress up their books.

Since most of those stock holdings are recorded at book value--a small fraction of their market value--switching to cash enables the companies to record a net gain to help offset the poor earnings from which they are suffering.

The recent arrest on bribery charges of a politician who once held a key position in Prime Minister Kiichi Miyazawa’s political faction also raised anxiety and kept buyers out of the market, analysts said.

Some analysts were hopeful, however, that in April--once the earnings-related selling pressure is off--there could be a strong rebound. They believe that the government will be under strong pressure to intervene in support of the market for political and economic reasons.

A poor stock performance, for one, could affect the ruling party’s chances of success in July elections for the upper house of Parliament, noted Uano of New Japan Securities.

And the Ministry of Finance is concerned that low stock prices will hurt financial institutions, which are large owners of stock.

The banks’ ability to lend is based on their capital, which includes holdings of stocks and land. The banks are already suffering from a sharp increase in bad loans tied to falling land prices.

Among the measures that could be taken by the government to spur the market would be a further reduction in interest rates and a lowering of the margin requirements for stock purchases.