NEWS ANALYSIS : U.S., Japan Stocks Fall Together : Economy: So far, experts see the only connection as psychological. But sharp Tokyo losses stir new concerns of global plunge.

By TOM PETRUNO

April 9, 1992 12 AM PT

TIMES STAFF WRITER

A 94-point plunge in the Dow Jones industrial average over the last two days--coinciding with the Japanese stock market’s latest free fall--is raising fears that the two markets have suddenly become locked in a vicious downward spiral.

Yet, so far, the only connection between the two market slumps appears to be psychological. Beyond that, the problems pressuring American stocks are far less onerous than those battering Japanese shares, and so are expected to disappear much more quickly.

On Wednesday, the Dow sank 32.20 points, to 3,181.35, after a 61.94-point tumble on Tuesday. That two-day decline of 2.9% in the Dow was the biggest two-day loss since the index plummeted 120.31 points last Nov. 15.

The U.S. market’s slide on both Tuesday and Wednesday followed steep losses in the Japanese market, which trades while New York sleeps: The Tokyo Stock Exchange’s Nikkei index plunged 644.82 points on Tuesday, then 616.02 points on Wednesday, closing at 17,175.53--its lowest since late 1986.

In Tokyo trading today, the Nikkei closed the morning session up 343.24 points to 17,518.77.

Japanese stocks have been falling for more than two years, from a Nikkei peak of nearly 39,000 late in 1989. But concern over the decline has taken on a new urgency in recent weeks, as the Nikkei dropped below 20,000 with a vengeance.

Although U.S. and European markets have mostly ignored Tokyo’s troubles since 1989, the Dow’s sudden slide this week raised the specter of a global stock meltdown somehow triggered by Japanese investors’ newest losses.

But constructing such a scenario is difficult, many analysts say. Most important, they note that the Japanese and American economies face in different directions now, with vastly different implications for the countries’ stock markets.

“We are in the early cycle of an economic recovery. They’re in the early cycle of something that they would categorize as recession,” says Stephen Roach, economist at the brokerage Morgan Stanley & Co. in New York.

Stocks go down at the start of recessions because corporate profits are expected to slide with the economy--as occurred in the United States in 1990.

In Japan, major corporations have issued dismal 1992 profit forecasts in recent weeks, which have contributed to the overwhelmingly bearish mood in the Tokyo stock market.

In the United States, meanwhile, investors had pushed stocks up late last year and early this year on the expectation that corporate profits would begin to grow again this year, as the U.S. economy climbs out of recession.

Those expectations were not built on myth. For example, on Wednesday, chemical firm Loctite Corp. of Hartford, Conn., announced that its earnings in the first quarter ended March 31 should be up 20% from last year’s depressed levels. That helped pull its stock up from a low of $40.50 on the New York Stock Exchange on Wednesday to close at $42.25.

Meanwhile, experts also note that the Japanese economy only now is dealing with the bursting of the speculative bubble that pumped up real estate prices there in the late 1980s and early 1990s. The extent of the fallout is unclear, but it is clearly spooking Japanese investors.

In the United States, by contrast, the economy has been dealing with a glut of commercial and residential real estate for nearly two years. Although the workout of the problems is ongoing, it is at least accepted as fact--and the U.S. financial system has already shown it can deal with the stress.

Another fear to hit the U.S. market this week--that Japanese investors would be forced to sell their foreign stock holdings to raise cash--has been badly overblown, according to some analysts.

Marshall Acuff, investment strategist at Smith Barney, Harris Upham & Co. in New York, notes that the U.S. market’s dive on Tuesday occurred late in the day. If it were driven by Japanese selling, he notes, the orders would have been bunched at the opening, a few hours after the Tokyo market had closed.

What’s more, even if Japanese investors were selling U.S. stocks, their orders alone wouldn’t be enough to move such a huge market for very long.

The Securities Industry Assn. estimates that Japanese net purchases of U.S. stocks since 1985 have totaled only between $20 billion and $25 billion. In contrast, the value of all U.S. stocks is nearly $4 trillion.

The Japanese, and other foreign investors, own a much larger share of U.S. federal debt: The SIA estimates that of $2.6 trillion in U.S. Treasury securities in public hands, foreigners hold $458 billion, or 18%.

But if the Japanese were dumping their Treasury bonds this week, the effect would have been to cause interest rates to rise. When there is an oversupply of bonds in the market because of a selloff, the yields--or interest rates--must rise to attract investors. Yet the yield on 30-year T-bonds has held steady around 7.9% since last week.

Why, then, have U.S. stock prices suddenly pulled back? Analysts say many American investors are simply viewing the latest Tokyo market slide as a wake-up call: While Wall Street is virtually certain that the U.S. economy will recover this year, some stocks rose far too quickly in the first quarter, reaching prices that investors have now decided are excessive compared to the pace of recovery in their companies’ profits.

“I think our stock market is reflecting a reality check--and the reality is that we face a slow recovery,” which will mean slow profit growth, said Allen Sinai, economist at the Boston Co.

It isn’t unusual for stocks to suddenly pull back 5% to 10% in the midst of a bull market, experts note, as investors wait for corporate profits to catch up. In fact, markets worldwide have dropped in recent months, after soaring in 1991.

The Dow, at 3,181.35 now, has dropped 3.3% from its peak reached in the first quarter. Many stocks have fallen even further, preceding the blue-chip Dow lower in March.

While U.S. stocks may go lower before stabilizing, few Wall Street analysts believe that the market will follow Tokyo into a free fall from here.

Admittedly, however, there is no way to know how deeply the Japanese economy will suffer because of the losses that Japanese banks, brokerages and major companies--all so closely interwoven--are incurring in the Tokyo stock market’s collapse. If the Japanese economy unravels, it will unquestionably affect demand for U.S. exports, which in turn could slow the American recovery.

But at this point, Wall Street doesn’t believe Japan’s pain will be severe enough to stop the gigantic U.S. economy cold.

“We are in a bull market, and as long as the economic recovery (continues), we’ll stay in a bull market,” said Jon Fossel, chief executive of the Oppenheimer group of mutual funds in New York.

Times staff writer Leslie Helm in Tokyo contributed to this story.