Tokyo Stock Plunge Stirs New Concern
As the Japanese stock market continues to tumble, investors and economists are growing increasingly worried that plummeting share prices are sapping the strength of some of the nation’s biggest companies and threatening to plunge the economy into a serious downturn.
On Monday, the Nikkei average fell below the psychologically critical 20,000-mark, dropping 618 points to 19,837.16. It was the Nikkei’s lowest level in five years.
The slide continued in early trading today as the Nikkei fell 129.37 points to 19,707.79 at the end of the morning session.
Ministry of Finance officials offered assurances that Monday’s dramatic fall was a temporary reaction to technical accounting changes made by Japanese companies. The Bank of Japan also downplayed the drop, insisting the move does not require a response from the central bank.
But many market observers are far less sanguine. They stress that the market’s plunge is beginning to crimp corporations’ ability to maintain investments, a key engine of the Japanese economy. And some are calling for strong government intervention to put the economy back on track.
“There is great anxiety about the economy and corporate earnings,” said Kosaka Uano, director of research at New Japan Securities.
Although the Japanese economy has not reached a U.S.-style recession and continues to grow, business news has been mostly downbeat for many months. Key companies such as Sony Corp., the big electronics firm with several investments in the United States including the former Columbia Pictures, have reported declines in pretax profits. And in April, when many Japanese companies announce year-end results, more are expected to report declining profits.
Japan has also been plagued by a year of corporate scandals, including a series of securities scandals that have also contributed to investor distrust in the market.
Low stock market prices have already shrunk the value of banks’ large stock holdings and forced them to cut back loans to meet capital reserve standards set by the Bank of International Standards. Over the last year, bank lending has actually declined for the first time in four decades, according to Kenneth Courtis, senior economist at Deutsche Bank Capital Markets.
Government officials were quick to assert that the market drop is transitory. “The market is not falling for structural reasons,” Finance Minister Tsutomu Hata told reporters Monday, suggesting that “some people believe now is an excellent time to buy.”
Ministry of Finance officials blamed the drop on the move by corporations to liquidate tokkin , stock investment trusts. The tokkin have been unpopular because of their poor performance in recent years.
Because Monday was the last day stocks could be sold with the sale recorded in fiscal 1991, some observers believe the worst of the selling pressure is over. Some foreign analysts who have been promoting Japanese stocks at current levels are fairly upbeat. “The bear market ends when the market reaches its low,” said Robert Zielinski, analyst at Jardine Fleming Securities. “Now we are beginning to see a firm bottom.”
Zielinski noted that many stocks of top Japanese companies are selling at their lowest price in 10 years. “With all the investments these companies have made, these companies are certainly stronger today than they were a decade ago.”
But Uano of New Japan Securities said the government must take dramatic action to snap the economy out of its gloomy state. He said it must go far beyond the expanded public works spending and interest rate cuts now being contemplated. “I would like to see a . . . tax cut,” said Uano, conceding that such a move was unlikely with Prime Minister Kiichi Miyazawa now politically weak.
Yoshiro Mori, chairman of the ruling Liberal Democratic Party’s Policy Research Council, said the Bank of Japan should give the economy a bigger boost by cutting its discount rate by 0.75 to 1 percentage point rather than the 0.5 percentage point now widely expected. Since the rate cut has been expected to occur within the next two weeks, traders say the action has already been discounted by the market and is unlikely to spur investor interest.
The Bank of Japan, in its standard response to questions about interest rate cuts, has continued to insist that no further cuts are necessary. The central bank is believed to be reluctant to cut interest rates for fear that it will drive the yen down and contribute to a worsening of Japan’s trade balance with the rest of the world.
The dollar ended in Tokyo at 134.30 yen, up from 133.63 in New York on Friday, as market observers interpreted the market drop as a further sign of a weakening economy. The falling yen and the declining market have been playing off each other in recent days in a slow downward spiral.
Courtis predicts both the yen and Japanese stocks will continue to fall in value as the government, also plagued by scandal, fails to move quickly to stimulate the economy.
Analysts said investors appear to be searching for a bottom to the stock market decline before buying back into the market.
