Japan Takes Steps to Boost Stock Market
Japan avoided a near-death experience Friday when its stock market reversed course and advanced 2.7% after a drop to dangerously low levels Thursday. In a bid to keep shares headed north, the government announced a package of stock-boosting measures and an interest rate cut.
The Friday rise might prove a short-lived relief to investors. Japan has no lock on jittery markets these days, but the stakes here in the world’s second-largest economy are arguably higher. The health of Japanese bank and corporate balance sheets is closely linked to stock values as the March 31 end of Japan’s fiscal year rapidly approaches.
The benchmark Nikkei index spurted 284.60 points to 13,422.83 in the wake of Thursday’s 1.7% drop. At one point Thursday the market fell below the psychologically important 13,000 level to a 28-month low. Many fear a Nikkei drop much below the 13,000 level might touch off panic selling. One trigger point could be 12,879.97, the 15-year low hit in October 1998.
Contributing to the stock market’s recent weakness are a number of negative economic reports, poor earnings results and the unwinding of so-called cross-shareholdings--shares often held for decades by friendly, related companies.
The Nikkei has declined in five of the last seven trading days and is down 2.63% for the year. Furthermore, many banks and companies have used past upturns to dump cross-held shares, leading some to predict additional declines next week. Analysts, meanwhile, panned the stock-boosting measures and rate cut announced Friday as too little, too late.
“These measures will only provide temporary help,” said Masashi Hyuga, senior economist with NLI Research. “In the long term, they aren’t effective.”
That hasn’t stopped the government from trying. In a bid to put a floor under the punch-drunk stock market, it set new rules allowing companies to more easily split their stocks and otherwise lower per-share prices to make shares more attractive to individual investors. Until now, rigid regulations often resulted in a single share selling for $10,000 or more.
The government also said it will make it easier for companies to buy their own shares, another way, in theory, to boost prices. And the Bank of Japan, Japan’s central bank, announced a cut in the discount rate--the rate at which it lends money to banks--to 0.35% from 0.50%.
Because individual investors have been burned so many times, most analysts doubted a rejiggering of share prices would prompt a massive buying spree. Minoru Kimura, a 60-year-old worker from Tokyo, agreed. He sold his entire portfolio in November after watching its value drop by half.
“These measures aren’t really designed to help small investors. They’re just trying to get out of all their bad-loan troubles,” he said. “Who trusts what the government says anymore?”
Nor are more lenient share-buying rules for companies seen as much of a panacea. In effect, analysts say, those that can afford to take advantage of the changes don’t need the help.
“Companies can’t buy their shares back if they don’t have the cash,” said Yi Chang, economist with Sumitomo Marine Asset Management Co. “Strong companies like Toyota can do it, but weak, struggling companies can’t.”
Finally, many say Friday’s discount rate cut is largely cosmetic, perhaps designed to deflect criticism from the Bank of Japan. The discount rate isn’t much of a factor because banks can borrow money from each other at the far lower “call rate.”
“It’s pretty much symbolic,” said Charles Lambert, stock market analyst with Jardine Fleming Securities. “I guess it’s the thought that counts.”
The unwinding of cross-shareholdings, meanwhile, continues to exert longer-term downward pressure on stocks. In Japan, companies and banks traditionally have held large blocks of one another’s shares in order to strengthen ties, prevent takeovers and reduce the influence of outsiders.
In recent years, however, the system’s many drawbacks have become increasingly apparent as the economy has faltered. The security it afforded allowed companies to grow complacent and hide problems that only worsened. Now, legal and accounting changes are putting pressure on banks and companies to sell these shares, a process expected to continue for years.
In just one example, major banks agreed in late 1998 to sell $17 billion in cross-held shares annually over the next three years in return for a government-financed bailout. In order to live up to their agreement in this, the second year of the program, they still need to sell $5.6 billion worth of stock by March.
A central concern is that low stock prices will destabilize the Japanese banking system, which has never fully recovered from its 1998 crisis and is still awash in bad loans. Bankruptcy is hitting bank customers in construction, real estate, trading, chemicals, oil and retailing. And banks have not been aggressive enough in the last two years about restructuring their bad loans.
This weakness has led to rumors that the government could engineer a forced bank merger or similar surprise as soon as this weekend. Banks it has reportedly been auditing include Chuo Mitsui, Daiwa and Asahi. Japan has a history of releasing bad news over three-day weekends--as it did in 1998 with the announced bankruptcy of Yamaichi Securities--to give itself more maneuvering room. Monday is a bank holiday here.
Meanwhile, few expect the impact of Friday’s stock-boosting measures to last through next week, let alone through March 31. In the past the government has bought stocks with state pension fund moneys in March to prop up bank balance sheets. It has backed away from this recently because it has lost its effectiveness as investors grew wary of such blatant manipulation.
“It’s a bit like whipping a horse,” said Garry Evans, strategist with HSBC Securities. “If you whip it too often, it grows immune.”
Rie Sasaki in The Times’ Tokyo bureau contributed to this report.
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Nikkei Nose Dive
Tokyo’s benchmark Nikkei stock index is nearing its 15-year low of fresh signs of another possible recession.
Nikkei stock index, monthly closes and latest
Friday: 13,422.83
Source: Bloomberg News
