Political Morass Could Trap Japan’s Economic Recovery : Trade: A split in the hours-old coalition government sends the Tokyo stock market lower as investors lose confidence.

The political chaos that hit Japan’s government early today, just 12 hours after the election of new Prime Minister Tsutomu Hata, may derail an expected economic recovery and lead to worsening trade friction with the United States.

The Tokyo stock market’s Nikkei index fell 118.92 points, or 0.6%, to 19,590.22 in the first 18 minutes of trading this morning, reflecting investors’ fears of a negative economic fallout from the collapse of the ruling coalition headed by Hata.

Investors “had bought the dream of return to efficient government led by a stable coalition and a prime minister who is very pragmatic,” commented Jesper Koll, an analyst with S.G. Warburg Securities. “And you are now short somewhere around 60 votes of a majority (for Hata’s government). Minority governments are inherently unstable . . . You have the knee-jerk reaction in the stock market.”

The entire cabinet of outgoing Prime Minister Morihiro Hosokawa resigned en masse Monday, in preparation for Hata’s election by parliament. But the naming of a new set of ministers, which normally takes place within hours, was blocked when the coalition split into conservative and leftist factions. Socialist Chairman Tomiichi Murayama announced early this morning that his party would leave the government.

Murayama said his party would help pass a budget for fiscal 1994, which began April 1, but would no longer be bound by any other policy agreements with other coalition parties. Passage of the budget, which contains some measures designed to stimulate Japan’s stagnant economy, is considered the most basic prerequisite to encourage renewed economic growth.

But much more active market-opening and economic-stimulus measures will be needed to address trade disputes with the United States in the face of Clinton Administration threats to impose retaliatory trade sanctions.

Japan has pledged to produce a program by June to “substantially” reduce its $141 billion global trade surplus, including a $60 billion surplus with the United States. New action to stimulate economic growth, thereby pulling in more foreign goods through an increase in domestic demand, is a key element of what has been expected. But it is no longer clear that Hata’s government will have the time or the political strength to focus on these issues before that deadline.

“The promise of clarity over the fiscal stance has been shattered,” Koll said. “You’ve got a government that is less likely to produce a permanent (income) tax cut, as desired by the U.S. government, before the July Naples summit (of the G-7 major industrial democracies).”

The sort of political upheaval that has now erupted had been feared for months, but many had hoped that the election of Hata would usher in a period of at least a few months of relative calm. Now the possibilities range from a quick political realignment that still gives Hata a working majority to a dissolution of the lower house of parliament and general elections.

Most of the possibilities have investors and analysts worried.

“If we have an election, and the result is not so good for the markets, that’s a big factor of risk,” Hirohiko Okumura, research director at Nomura Research Institute, said in a recent interview when it still appeared the coalition would hold together. Hata’s elevation to be prime minister was expected to be a factor for political stability, he said. Now that confidence in basic continuity of government policies is gone.