Turmoil Roils Tokyo Markets, May Stall Recovery : Japan: Hosokawa’s economic stimulus plan is in trouble; the prime minister may lose his job. Stocks plunge in early trading.
Pessimism sparked by the defeat late last week of Prime Minister Morihiro Hosokawa’s anti-corruption political reform package prompted a sharp plunge in Tokyo stocks early today.
Hosokawa’s setback in Parliament clouds prospects for quick passage of an economic stimulus program, which investors have counted on to jump-start Japan’s stagnant economy. Political disarray in Tokyo also poses new difficulties for the resolution of U.S.-Japan trade disputes.
Hosokawa’s fragile, seven-party coalition government has been drawing up a $120-billion program of public works outlays, other spending programs, deregulation measures and income tax cuts aimed at pulling Japan out of its worst postwar recession.
But action has been delayed by the priority given to the anti-corruption political reform package and by a split in the ruling coalition over whether income tax cuts should be balanced by a consumption tax increase.
The Hosokawa cabinet’s inability to quickly enact a stimulus program adds to already deep gloom about the economy’s short-term prospects.
The Tokyo Stock Exchange was closed Friday when Parliament’s upper house voted down the political reform. In mid-afternoon trading today, the Nikkei was down 842.58 points, or 4.4%, to 18,464.85. An equivalent drop in U.S. markets would shave 168.32 points off the Dow Jones Industrial Average, which starts the week at 3914.48.
“The biggest reason for the decline is the failure of the political reform bills in the Upper House,” noted Tomoatsu Yamamuro, a trader at Yamaichi Securities Co.
After plunging during the final months of last year, Tokyo stocks had risen sharply in recent weeks on investment by foreign bargain-hunters and expectations that a stimulus package might finally set the economy on a path toward renewed growth.
“U.S. pension funds and mutual funds (have been) buying Japanese shares,” Tetsuo Tanimura, vice president at CS First Boston (Japan), explained earlier this month, while the market was rising. “It would be too late after signs of economic recovery are seen.”
The relative optimism of foreign investors continued this morning. “The encouraging thing is that foreigners are not changing their positions as net buyers,” commented a trader at a foreign securities firm.
Widespread Japanese sentiment was reflected in comments after Friday’s vote by Masaru Hayami, chairman of the Japan Federation of Corporate Executives. “I feel absolutely frustrated,” he said. “Japan will suffer if, in a political vacuum, something is not done about the economic slump.”
The Clinton Administration also is worried about the potential effects of political turmoil in Tokyo.
Washington hoped that Hosokawa’s reform-minded administration would push broad deregulation of Japan’s economy and nurture greater receptivity to imports. But those expectations are now threatened by the possibility that the prime minister himself will be out of office within weeks, either through resignation or a decision to call new parliamentary elections.
Hosokawa had hoped to achieve passage of political reforms on Friday and announce an economic stimulus program this week. The idea was to have both packages firmly in hand before meeting President Clinton Feb. 11 in a trade-oriented summit.
The prime minister still has that aim, even if political reform has to be watered down and economic policies need to be patched together amid political confusion. But Hosokawa may arrive in Washington without either one. There also is great uncertainty whether any significant bilateral trade agreements will be ready for signing at the summit.
U.S. Treasury Secretary Lloyd M. Bentsen, visiting Tokyo, said Sunday that the trade talks could fail to produce acceptable results. In that case, the United States may take a more forceful approach to prying open Japanese markets, he said.
A failed summit could lead to U.S. efforts to promote a stronger yen--and that would hurt Japan’s ability to export.
Washington could also decide to impose trade sanctions if other measures prove unsuccessful in boosting U.S. exports to Japan and reducing the bilateral trade imbalance, which hit about $50 billion last year. Any such measures would further chill prospects for recovery in Japan.
Hosokawa will try again this week to reach a compromise with the opposition Liberal Democratic Party to allow passage of a revised set of reform bills.
But attempts at compromise could put further strains on his own coalition.
“Government ministries and ruling coalition parties are currently working on the budget, but their efforts will not be 100% as long as the political reform bills are pending,” Foreign Minister Tsutomu Hata, a key coalition figure, acknowledged after defeat of the original reform proposal.
Hosokawa’s cabinet was already behind schedule in preparing a budget for the 1994 fiscal year, which begins April 1. Many of the proposed stimulus measures are intended to go into this budget.
With the ruling parties in disarray, it is unclear when the government can focus on the economy. Should a general election be called, strong economic measures could be postponed for months.
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