Tokyo Fiddles While The Nikkei Burns

If you thought the Nikkei roller coaster was over, watch out. Real estate fiascos, new cracks in the insurance giants, and more bad economic news are all bearing down on Japan's deflated stock market. Once, the betting was that a Nikkei falling to 16,000 would spell disaster. Now, with the market closing on June 24 at just 15,854, gurus say it could sink a further 20%. And some bears argue that the fair value for Tokyo stocks is an incredibly low 6,000 to 8,000.

The stock market sell-off is starting to rattle Japan's financial Establishment. Three of the top eight insurance companies are busy adding up losses on their massive stock portfolios. Cash cushions at major city banks, once fat, are now uncomfortably thin. And analysts warn that if the economy does not improve soon, banks struggling to prop up troubled borrowers may soon get hit harder. "If the government steps in too late to support the economy," says Tetsuo Tsukimura, an economist at Smith Barney, Harris Upham & Co., "the financial system will collapse entirely."

HANDS OFF. Yet the government is curiously silent. Japan's regulators could prop up the market by diverting a greater portion of the $2.3 trillion in funds for public pensions, insurance, and postal savings into stocks or by cutting capital-gains taxes. But officials say no such measures are imminent. Banks aren't collapsing, they insist, and real estate prices are still too high. Nor are central bankers inclined to cut interest rates, saying Japan's "bubble" economy still needs deflating. True, "there has been a loss of confidence," admits one senior official. "But supporting the stock market is not a policy objective."

The laissez-faire strategy could be risky. Some fear that as the Nikkei stock average moves to new lows, losses could unravel the interwoven financial system. Take the real estate bust, involving property and finance companies and the banks that back them. Mitsui Trust, for instance, helped bankroll Azabu Tatemono and Dai-Ichi Real Estate Group on binges in the late 1980s. The two companies are now struggling to pay interest on huge debt, one-third of which is owed to Mitsui. The trust bank's shares plunged 25% in June and are just 18% of their peak value in 1987.

`LONG WAY TO GO.' How bad could things get? Kathy Matsui, market strategist at Barclays de Zoete Wedd Ltd. (BZW), thinks one big bankruptcy could trigger a run on the market, pushing it down to 13,000, as financial companies, fully one-fourth of the Nikkei's value, are sold. But Tsukimura at Smith Barney believes gradual loosening of cross-shareholdings and slower long-term growth will push the market as low as 6,000. "We're still in a decline," says Tsukimura. "There's a long way to go down."

Banks may lead the way. One estimate puts bad loans at $424 billion. That figure is sure to rise as the lifeless economy topples ordinary manufacturers in addition to speculators. Tsukimura thinks a few banks could go under. To cope with the spread of red ink, sources say Tokyo may even set up a U.S.-style Resolution Trust Corp.

A few see some relief down the road, perhaps by yearend. BZW's Matsui expects the Tokyo bourse, like the New York market, to rally six months before industrial production and indicators pick up. That would send the market to around 22,000, says Matsui. "It won't be a 1980s-style bull market," she says. Those days seem long ago indeed.

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