Nation Showing Symptoms of Asia’s Financial Flu

The persistent worries about Asia’s future are shifting to economic giant Japan, where the top finance bureaucrat admitted Friday that the economy has come to a “standstill” and unsettling bank rumors helped send the Tokyo stock market plunging.

The angst was worsened by a fresh wave of downbeat assessments warning that the currency and market turmoil sweeping Southeast Asia and Korea will inevitably take its toll in the country and could even imperil efforts to reform Japan’s economic system.

“The deeper, wider slowdown in Asia will hurt Japan,” said a report Thursday from Salomon Bros. Asia Ltd. “Political paralysis is delaying fiscal decisions. Business and consumer sentiment will likely suffer further.”

Echoing markets in Hong Kong and Korea, Tokyo’s widely watched Nikkei-225 index tumbled 697.51 points, or 4.22%, to close at 15,836.36, its lowest level since July 6, 1995.

The yen fell to as little as 124.00 against the dollar, its lowest level in six months. Annual yield on the benchmark 10-year Japanese government bond dropped to a record low of 1.575%, reflecting investors’ beliefs that Japan’s economy is so weak that interest rates will continue to be held extremely low to prevent the country from slipping back into recession.

Even government officials, who for months have insisted that a slow recovery was on track, issued newly pessimistic evaluations of the economic outlook.

“It is true that the economy has come to a standstill,” Finance Minister Hiroshi Mitsuzuka said Friday. “But the government is trying to stimulate economic activities through economic structural reform, including further promotion of deregulation.”

On Thursday, Bank of Japan Gov. Yasuo Matsushita said the Japanese economy had suffered “profound and long-lasting” impact from sales and income tax hikes imposed April 1.

Japan has been in recession or slow growth for most of the 1990s, and now it is surrounded by currency and market crises spanning the region from South Korea to Malaysia. The implications are serious for the country’s banks and multinational companies, which are major investors throughout Asia.

Friday brought still more regional contagion. The Korea composite stock price index plunged a record 6.9%, to 515.63, while that country’s currency, the won, posted another record-low close against the dollar, falling to 979.90 from Thursday’s close of 975, despite two bouts of central bank intervention. The Korean currency has lost 16% of its value this year.

Central bank and finance ministry officials said Seoul had no intention of devaluing the won or going to the International Monetary Fund for help, as published reports have speculated.

The won’s troubles, meanwhile, were blamed for a 2.96% plunge in Hong Kong’s Hang Seng stock index, to 10,104.5. The latest fall in shares brought the decline to nearly 40% since a record high in August, just after Hong Kong passed to Chinese control.

“If the won continues to go down, the New Taiwan dollar will have to go down . . . in which case holders of Hong Kong dollars are going to get a little nervous,” said James Robertson, vice president at Salomon Bros.

In Japan, a report that the country’s largest regional bank, the Bank of Yokohama, would sell off its stocks in other firms heightened uncertainty over changes roiling Japan’s banking system.

The stocks were reported to have a book value of $4.8 billion, which means their market value probably would be more than that. Bank officials quickly said the published report overstated its plans but that the bank will continue selling off some of the stock it owns.

Japanese corporations are often tightly linked through a complex system of cross-shareholding, by which institutions own shares of other institutions in the same industry and firms in other industries. These cross-holdings cement business ties and help keep independent shareholders from mounting challenges to management’s control of the firms.

While the cross-shareholding system was once viewed as a strength of Japan Inc., in recent years it has come to be seen by many Japanese and foreign analysts as a barrier to the kind of flexibility needed to maximize return on capital. Many firms have been slowly unwinding their cross-shareholdings, and the published report on the Bank of Yokohama was seen as a sign that this process may accelerate.

While that could be good for Japan’s economy in the long run, it would involve considerable short-term pain, including downward pressure on stock prices as firms sell off long-held stocks that have not given good returns.

Meanwhile, the Salomon Bros.’ report on Japan to investors, titled “Retreat From Recovery,” slashed projections for economic growth to zero for the current fiscal year ending next March 31 and only 1.5% for the following year.

“The government of Prime Minister Ryutaro Hashimoto is committed to fiscal consolidation and is loath to pause in the path toward that goal despite the weakening of the economy,” the report explained. “Opposing the government stance are not only some opposition political parties, who favor income tax cuts for individuals, but also backbenchers in the prime minister’s own party, who favor increased spending and corporate income tax cuts.”

The result of this political mix, it predicted, will be further delays in deciding and implementing policies that could give a strong boost to the domestic demand needed to kick Japan’s economy into higher gear.

Hashimoto’s administration is caught in a bind because it has pledged to reduce Japan’s long-term government deficits, partly as a way to prepare for the aging of Japanese society in the next century, when fewer numbers of workers will need to support larger numbers of elderly. That goal runs counter to the kind of tax cuts or spending programs that could boost economic activity in the near term.

*

* JOBLESS RATE DROPS: The nation’s unemployment rate falls to a 24-year low of 4.7%. A1

* BLUE CHIPS SLIDE: Broad stock indexes tumble on jobs report and concerns abroad. D2

Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Dow, Again

After making some gains, many markets fell again Friday. The last two weeks:

U.S. (Dow industrials)

Friday: 7,581.32

Japan (Nikkei-225)

Friday: 15,836.26

Hong Kong (Hang Seng)

Friday: 10,104.50

Brazil (Bovespa)

Friday: 8,832.62