Nikkei Stock Index Drops Below 11,000
Japan’s benchmark Nikkei-225 stock index closed below the 11,000 level Wednesday for the first time since 1984, intensifying pressure on economic planners and further eroding already low consumer confidence.
The blue-chip index fell 209.64 points, or 1.8%, to close at 10,979.76. In early-morning trading today, the Nikkei was off 153 points, or 1.4%, to 10,826.43. With Japanese interest rates at near-zero levels, government finances in deep trouble, state stock-buying measures largely discredited and a voluntary spending cap in place, the administration of Prime Minister Junichiro Koizumi finds itself hemmed in at every turn.
“They’re really running out of options,” said Richard Jerram, economist with ING Barings. “Everything looks pretty terrible.”
The one thing economic planners seem to have in ample supply, analysts said, is complacency. Senior government officials appear largely unfazed by deteriorating conditions, economists said, despite a decade-long downturn and a U.S. economic engine that’s sputtering worse than expected.
The market reacted negatively to comments made Tuesday by Hakuo Yanagisawa, state minister in charge of financial policy and the official overseeing bank reform, that it would take at least seven years to dispose of just half the nation’s bad bank debt.
This contradicted earlier statements that the problem would be tackled within two years, and provided evidence to some that Japan planned to continue its patchwork policies.
“We’re imploding,” said Ron Bevacqua, economist with Commerz Securities Japan. “Still, there’s no sense of urgency.”
Part of this may stem from a little-noticed change to the Commercial Code three months ago that effectively gives banks more breathing room to meet capital-adequacy ratios even as share prices decline, he added.
The Nikkei’s fall below 11,000 raises the prospect that this index, which topped out at 38,915 on Dec. 29, 1989, could fall below the level of the Dow Jones industrial average, which closed Wednesday at 10,090.90.
“Who would have ever thought they’d be at nearly the same level?” said Tsuyoshi Shiba, an economist with Sumitomo Marine Asset Management. “Yet it’s happening.”
The decline, along with a record 5% unemployment rate announced Tuesday, almost certainly will undermine consumer confidence further, even though today’s Nikkei average has a very different composition than its 1984 counterpart, one that has amplified the decline.
“Still, the Nikkei is what everyone watches,” said Chuck Lambert, market strategist with J.P. Morgan. “All they’ll see are the headlines that it’s at a 17-year low. This will impact the average Japanese on the street.”
Michiko Kida, a 56-year-old employee at a small Tokyo-based trading company, agreed and said the bad news seems relentless these days. Phones in the sales department of her own company stopped ringing this month, she said, and her personal finances look increasingly bleak.
“I’m cutting back on everything but necessities,” she said. “I used to search out bargain sales but now I even avoid those.”
Akira Hashimoto, a 35-year-old salesman, said stocks are far from attractive right now. “The price is just going to keep going down, so I wouldn’t buy them even if I had some spare cash,” he said.
Other factors weighing down the market, analysts said, include the recent unwinding of cross-shareholdings--shares that Japanese companies hold in related companies--the renewed decline in U.S. stocks and diminished confidence that Koizumi can deliver on his reform plans.
“It looks more and more like reform isn’t going to happen,” said Kazuyuki Tazawa, analyst with Sumitomo Life Research Institute, part of the life insurance company.
Economic planners, meanwhile, find themselves with relatively few levers to help jack up the stock market, even if they wanted to try.
Even though the government is expected to pass another supplementary budget within weeks, it probably will be a modest $16 billion or so given Koizumi’s pledge to cap new debt issuance. This amount won’t provide much economic stimulus.
On other fronts, the central bank does have the option of flooding the financial markets with money. Still, both the central bank and Koizumi have voiced opposition to such a step, making a significant step in this area unlikely.
Providing tax breaks for capital gains, also under discussion, won’t do much either because few investors are enjoying capital gains.
And short-term measures tried during past market meltdowns--including accounting changes to make things look rosier than they are or government stock purchases--are viewed with increased skepticism by the market.
The one option that would bring joy to stockville would be an aggressive, meaningful bank debt plan that included taxpayer bailout money, a willingness to admit the real scope of the problem and an aggressive time frame for writing off bad loans.
“This would be the most effective,” said Matthew Poggi, economist with Lehman Bros.
Given the political cost of such a move and Japan’s past distaste for bitter medicine, however, few analysts see much hope of this happening any time soon.
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Hisako Ueno in the Tokyo bureau contributed to this report.
