Can Tokyo Keep The Nikkei From Going Through The Floor?Robert Neff
Japan's financial barons are in a blue funk. Tight money is making the once-vibrant Tokyo stock market seem like a graveyard. Making matters worse, the Japanese economy is slowing to a crawl.
Sounds like Tokyo today, right? Guess again. That was Japan, circa 1965, during the country's last big stock market crisis, when the Tokyo market plunged 39% before bottoming out. This time around, the Nikkei Stock Average is down 47% from its peak of 38,915.87 at the end of 1989. So, worried that banks, real estate values, and the rest of the economy will take a pounding if the market drops much below the psychological threshold of 20,000, politicians and regulators are mulling over a variety of measures to keep stocks afloat. "When you get under 20,000, there's no support left," frets one Tokyo fund manager. "People could start panic-selling because they think there's no bottom."
LITTLE AVAIL. To avoid such a panic, the ruling Liberal Democratic Party (LDP) and the four major stockbrokers are urging big changes in Tokyo's securities rules. They want companies to pay higher corporate dividends and are considering allowing stock buybacks and cutting the capital-gains tax (table). Yet bureaucrats and financiers fear that this rescue package may have as little impact as one they tried 27 years ago.
Back then, even brokers' massive purchases of shares couldn't stop the Nikkei's fall. It took sharply lower interest rates, together with the prospect of real economic recovery, to bring the bloodletting to an end. Japan's financial community is convinced similar action is needed today. Nothing short of a dramatic cut in the Bank of Japan's 4.5% discount rate is likely to lure significant sums back into the market, traders say. With falling stock prices putting pressure on banks and real estate, "what this market is waiting for is the Bank of Japan saying this economy needs help," says Robert Zielinski, an analyst at Jardine Fleming Securities Ltd.
Trouble is, forceful help probably isn't yet in sight. In fact, Bank of Japan Governor Yasushi Mieno, wary of inflation, is moving with caution. Even though Merrill Lynch & Co. estimates that the Japanese economy will expand just 2% this year, Mieno insists growth will hit 3.5%. That means he's unlikely to cut the discount rate more than a modest half a percentage point in March.
With Mieno refusing to ease much, the LDP is focusing on micromeasures to lessen Japan's financial stress. But even these proposals fall short of what's needed. Take the party's plan to hike dividends. It suggests that companies raise their payout to 50% of profits, up from the current 33%.
TIMID STEPS. Still, this won't provide much more than a psychological boost. Zielinski notes such an increase would raise average yields from 0.7% to 1%--hardly enough to win back wary investors. Financial mavens are as cool to a similar plan by the Tokyo Stock Exchange and the Japan Securities Dealers Assn. to increase the payout modestly on shares issued after April. "This alone won't be enough to revive the market," concedes Tohru Akatsu, the exchange's research and planning chief.
LDP proposals to lower levies on capital gains, meanwhile, are getting a chilly reception where it matters most: at the Finance Ministry. Even though individuals pay only 1% on capital gains, the cash-strapped ministry is loath to forgo any revenue--as tax collections slow along with the Japanese economy.
With money still tight, the ministry is equally reluctant to prod investment trusts, the local equivalent of mutual funds, to put more money into stocks. "It would be ridiculous for the ministry to encourage institutions to buy more shares. They aren't a safe investment," says Akio Mikuni, owner of a Tokyo credit-rating agency.
Even if these remedies work, most would require approval by Japan's Diet. But a new series of scandals enveloping the LDP has brought the legislature close to gridlock. As a result, lawmakers are way behind schedule on considering the budget for the next fiscal year, which begins on Apr. 1. There isn't likely to be any time left to take up market-support legislation.
That could be unwelcome news for Wall Street, which saw Japanese investors pull $2.9 billion out of U.S. stocks as the Nikkei began its long slide. And Japanese banks, which are allowed by regulators to consider unrealized profits on their vast stock portfolios as capital, would greet a plummeting Nikkei with even greater dismay.
DEEP EROSION. Most of the gains that help keep the banks' capital up to internationally agreed-upon standards will start melting away once the average falls to around 18,000. With the banking industry already facing an estimated $80 billion in bad loans at home and abroad, traders fear such erosion could leave some institutions short on capital when new international banking-capital adequacy standards take effect in 1993. "The deterioration of the financial system," says Moody's Investors Service analyst Masaru Kakutani, "is becoming a critical issue."
Some worry that any capital shortfall would force banks to dump equities to raise cash, putting even more pressure on the market. But most banks may have already insulated themselves from all but the worst Nikkei shocks.
For example, Japanese lenders have withdrawn some $34 billion from U.S. banks since the Tokyo market peaked. They have also sold billions of dollars worth of other assets and issued subordinated debt. Some are likely to start selling high-yielding preferred shares to Japanese insurers. "The relationship of the stock market to the capital standards isn't nearly as serious as many people think," says David Atkinson of Salomon Brothers Asia Ltd.
Maybe not. But most traders believe that even inflation hawk Mieno won't want to test that proposition for too long if the Nikkei drops very far below 20,000. "We would get an interest-rate cut pretty quickly," says Stephen B. Cohen, managing director of Warburg Investment Trust Management Co. Indeed, some foreign investors, betting rate reductions are inevitable, are already buying into Tokyo whenever the Nikkei sags. "Every time they put stocks on sale," says Elizabeth J. Allan, portfolio manager for Japan Fund Inc., "we'll buy a few."
Despite all the gloom and doom enveloping the Tokyo market, "we haven't reached the panic stage yet," Allan maintains. Just like the traders of 1965, she and a lot of other market players are counting on a quick shot of cheaper money to give Japanese stocks the boost they desperately need.
TRYING TO PROP UP THE NIKKEI Here are some steps that Japan's financial regulators are considering to halt the Nikkei Stock Average's long slide: -- Cut interest rates The Bank of Japan is expected soon to slash its discount rate by a half percentage point, to 4% -- Reduce taxes on stock transactions The move could boost trading volume, but a 1990 capital-gains tax cut had little effect -- Permit companies to buy their own shares Could prop up stock prices, but many companies don't have the cash to take advantage of this change -- Urge higher dividends Could attract new investors, but payouts would remain modest -- Pressure banks to limit lending Will ease pressure on banks to sell off assets, but will slow the economy DATA: BW