Japan Stocks Dive Despite Cut in Key Rate : Markets: Investors are not impressed with central bank’s dropping of discount rate. Nikkei hits lowest level in 5 years.

The Japanese stock market fell this morning to its lowest level in more than five years as investors were unimpressed with a move earlier in the day by Japan’s central bank to cut its official discount rate.

The market dive reflected growing fears that the Japanese economy is worse off than previously believed.

The move by the Bank of Japan to cut its discount rate by 0.75 percentage point, to 3.75%, had long been anticipated and failed to lighten the dark mood on Kabutocho, Japan’s Wall Street. Computer-generated selling pushed the 225-issue Nikkei stock average down 537.24 points, or 2.77%, closing the morning session at 18,808.71. That was the lowest level since the Nikkei closed at 18,784.27 in January, 1987.

“Japanese were mega-bullish during their golden years (in the late 1980s) and at the moment they are mega-bearish,” said Peter Boyce, a trader at the Tokyo office of British securities house James Capel & Co. “They could be overreacting.”

Nevertheless, analysts worry that the market’s fall could broaden anxiety about the economy and slow corporate and consumer spending. The market’s decline could also further constrain bank lending.

Bank of Japan Gov. Yasushi Mieno, who recently admitted that the economic downturn could last longer than he originally anticipated, said the central bank’s discount rate cut, “combined with the fiscal measures, will make a sufficient contribution to stable economic growth.”

Analysts, however, dismissed as “window dressing” a series of measures the Japanese government announced Tuesday to spur the economy, including a decision to “front load” public works budgets.

“Front loading is just shifting money that was going to be spent anyway,” Boyce said. “It doesn’t add anything extra.”

And many economists said the central bank’s interest rate cuts may do little to persuade corporations to boost investments. Companies still do not see demand picking up and, meanwhile, are working through inventories built up as a result of the popping of Japan’s speculative bubble.

“Once the balloon bursts, you can’t just pump air back into it,” said Tetsuo Tsukimura, chief economist for the Tokyo office of Smith Barney, Harris Upham. Japanese investors now have a “deep distrust” of the stock market, he said.

Brokers are finding plenty of reasons for further pessimism on Kabutocho.

Foreign investors, who have been the primary buyers in the Japanese market, are already heavily weighted in Japanese stocks. Many bought shares hoping that the government’s measures would inject some life into the stock market. This is the third time in a year that they have built up their Japanese shareholdings in hopes of a rally, and they may be turning more wary of Tokyo shares.

Others are waiting for lower prices before coming back into the market. Some technical analysts put the next support level as far down as 15,500.

Meanwhile, domestic investors are staying away from Japanese stocks. One worry is that Japanese banks, unable to meet Bank of International Settlements capital requirements by the deadline early next year, will begin unloading their shares to raise capital.