Market Slump Seen as Return to ‘Reality’ : Japan: Flagging consumer confidence blocks economic upswing, analysts say.
Does the more than 15% slump of Japanese share prices this month herald the financial meltdown of which many investors and analysts have warned?
No, say Japanese government officials and many local analysts. They reckon that recent declines are just the latest stage in the painful process of winding down the speculative binge that gripped Japanese financial and real estate markets in the late 1980s. The government is not considering any special stimulus to halt the slide in stocks, Prime Minister Morihiro Hosokawa said today.
“Prices are just reflecting the concern that a lot of these stocks have been held up artificially for a long time, and now they’re starting to come back down to reality,” said Frank Nelson, vice president of equity derivatives at Lehman Bros. in Tokyo.
That is not to say there hasn’t been a lot of damage done--and a lot more could be in the offing. When the Nikkei 225-stock average closed Friday at 16,716.37, 10 months’ worth of gains had evaporated in a little more than three weeks of trading.
Already the bears are out in force. Nicholas Knight, a market strategist with Nomura Securities in London, last week warned that the Nikkei could sink to 12,000 before the slide is over.
More important, the fall in equities could further batter Japan’s economy at a time when it is showing little sign of recovering from a slump that saw gross domestic product drop 2.1% (on an annualized basis) in the third quarter, according to Takashi Oshio at Morgan Trust Co. in Japan. Though government officials say a turnaround is near, he’s not a believer. He reckons that GDP will sink 1.9% further in the current quarter.
“If confidence spirals down with the stock market, economic data could worsen,” said Michael Harnett, an economist with Schroder Securities.
That is no small matter. Though its competitors tend to think of Japan as nothing more than a manufacturing juggernaut, consumer spending, in fact, accounts for some 60% of GDP, not much less than the two-thirds share it commands in the United States.
And the Japanese aren’t in a buying mood. The Ministry of International Trade and Industry reported Friday that sales at Japanese department stores and supermarkets fell 3.6% in October from year-earlier levels. More telling still, sales have been falling for almost two years.
All told, average Japanese household spending fell 1.7% in September, the fifth straight month of year-to-year declines, according to the government’s Management and Coordination Agency. “Consumers are still choosing to save rather than spend,” Harnett said.
Japan’s battered corporations are in neither the mood nor the position to pick up the slack. After engaging in a capital spending boom brought on by dirt-cheap interest rates in the late 1980s, many manufacturers now find themselves stuck with excess capacity.
And those idle production lines are increasingly uncompetitive, thanks to the soaring yen, which is up 15% against the dollar for the year.
Small wonder, then, that MITI projected that corporate spending on plant and equipment for the fiscal year ending in March will fall 3.5% from year-earlier levels to $175 billion, according to Jiji Press. The same survey of 1,835 large and medium-size companies found that spending would decline 0.1% further in fiscal 1994, for three consecutive years of declining capital spending--a record, MITI said.
Even if consumer demand picks up, Japanese banks are in no position to pump out credit, even though the Bank of Japan’s discount rate stands at a record low 1.75% since a half-point cut Sept. 21.
It was the sorry state of Japanese banking that prompted the latest selloff in Tokyo shares, and there could be more bad news to come. Japan’s seven trust banks and three long-term credit banks reported dramatically lower half-year earnings Friday, amid mounting loan losses and a tide of non-performing loans, much of it due to the collapse in Japanese real estate.
That grim news came on the heels of news that Japan’s 11 largest commercial banks posted a combined 27% slide in half-year profits.
Though the poor results were widely expected, bank stocks fell, and that triggered the broader market’s decline.
Though the Bank of Japan has been pushing money market rates lower, in what analysts call a modest move to bolster confidence in stocks, lower rates alone won’t solve the broader problems.
Although the government of Prime Minister Hosokawa has promised a wide-ranging stimulus plan, it is unclear whether it has the political will or the muscle to deliver the sort of sweeping income tax cut that many economists and Japanese executives believe is needed.
* SELLOFF CONTINUES: Japanese stocks were still plunging today. A21.
