Fear Stalks The Nikkei

Tokyo brokers were lunching at their desks on Jan. 21 when the headlines started flashing across their video screens. Japanese Finance Minister Tsutomu Hata was calling for a stronger yen. Eagerly, the traders awaited a similar vote of support for their sickly stock market. But nothing came. So an hour later, as the Tokyo Stock Exchange's afternoon trading session began, the Nikkei stock average tumbled 260 points, or 1.2%. "Everyone," complained Jason C. James, market strategist for James Capel Pacific Ltd., "was disappointed."

For the third year running, disappointment is the dominant mood in shell-shocked Kabuto-cho, Japan's Wall Street. Although the U.S. and many other global equity markets are surging, Tokyo is still gasping for breath. At around 21,000, the widely watched Nikkei (chart) is down 46% from its 1989 record high. But few expect a recovery anytime soon. For one thing, investors are jittery over a new political scandal swirling around the ruling Liberal Democratic Party. Trade tensions with the U.S. are mounting. And some $58 billion worth of personal and corporate equity trusts are due to expire this year, estimates Merrill Lynch Japan Inc. strategist Munenori Wakita.

SLOW GROWTH. Wakita and others believe that investors in the trusts are looking for any excuse to liquidate large parts of their equity holdings before the end of the corporate fiscal year on Mar. 31. Any sign of that could push the Nikkei back to 15,000, its lowest point since 1986, says Tetsuo Tsukimura, an economist at Smith Barney, Harris Upham & Co.

In the past, traders shrugged off such predictions, confident that Japan's ultracompetitive $2.8 trillion economy would in the end bail them out. But with two years of high interest rates crimping domestic spending, the traders aren't so sure anymore. The Organization for Economic Cooperation & Development estimates Japanese gross national product growth at only 2.4% this year, the poorest annual showing since the oil shock of 1974.

Even worse, the weakness of the Tokyo stock market has stripped Japan of its longtime cheap-money edge. When Tokyo was booming, many companies floated bonds yielding 1% or even less by giving investors warrants to buy shares in the future at bargain prices. But with 10-year government-bond yields now around 5.3%, vs. 7% in the U.S., Japanese companies are paying nearly as much as American ones. As a result, hot-money-fueled foreign takeovers are all but dead, and domestic spending on new plants and equipment is plummeting.

LITTLE CUSHION. Adding to the crunch, Japanese banks are turning away borrowers because they fear they are running short of funds. Banks count unrecorded gains on their stock-market holdings as capital. But as the market languishes, much of the banks' cushion has disappeared. Tokai Bank Ltd., for one, already fails to meet internationally agreed-upon capital standards. If the Nikkei slips under 20,000, even the august Bank of Tokyo Ltd. says it, too, will fall short. Says Shigeru Masuda, president of Zeron Capital Management Inc.: "Below 20,000, Japanese banks have a big problem. Industry has a big problem. The nation has a big problem."

Despite such concerns, the Finance Ministry seems unwilling to try to prop up the market. For one thing, Bank of Japan Governor Yasushi Mieno hasn't abandoned his attempts to squeeze out the speculative excesses of the 1980s that sent stock and real estate prices into the stratosphere. Although he cut the discount rate in December from 5% to 4.5%, the third reduction since last July, Mieno remains concerned that high asset prices will rekindle inflation. And in the wake of a series of messy brokerage-house scandals last year, Finance Minister Hata also is likely to offer brokers little aid. "Supporting stock prices is equivalent to helping the brokers," says Kyoto University professor Kazuhide Uekusa. "The Ministry of Finance doesn't want to be seen in this light."

With powerful Finance bureaucrats taking a hands-off stance, the once-thriving brokerage industry has already cut employment by 4%, to 161,000. In contrast to U.S. brokers, which are hiring and expanding again as Wall Street booms, several Japanese brokers are planning to shut 30 branches and nudging workers onto the street by offering meager bonuses or unrealistic transfers. Some small brokers that are losing money are likely to merge with competitors.

STEERING CLEAR. Some analysts are trying to see a bright side amid all the gloom, arguing that many issues are bargains for the first time in years. Average price-earnings ratios on the Tokyo Stock Exchange have tumbled from a peak of 68 two years ago to around 40 now. After adjusting for accounting and tax differences, that isn't much out of line with the 24.3 p-e for the Standard & Poor's 500-stock index. Indeed, some Japanese blue chips now are cheaper than their U.S. competitors. Fuji Photo Film Co., for one, now fetches a p-e of 15.6, vs. 21.2 for Eastman Kodak Co. But despite such enticements, the smart Japanese money is staying clear. And overseas buyers, a major source of support last year, have vanished. With corporate earnings slumping and yields below 1%, "the return is not sufficient," says Akio Mikuni, owner of a Tokyo credit-rating service. "The market must come down, or there will be no revival of trading."

Tokyo newspapers are now speculating that if the bottom under the Nikkei should suddenly give way, stockbrokers might join forces to buy massive amounts of stock, as they did after the Japanese market crashed in 1965. But even that might do little more than bring the carnage to a temporary halt. When they moved to deflate the "bubble economy" of the 1980s, Japanese regulators took a calculated risk that a dose of harsh medicine would set the stock market and the economy on a firm footing for the next decade. So far, the cure seems worse than the disease.

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