Japan on brink of disaster

Further drop feared after Nikkei hits three-year low

DEALERS on the Tokyo stock market are holding their breath for a further plunge in share prices when it opens tomorrow. Investors and bankers are waiting in trepidation, because a further drop in the market could trigger the worst financial crisis in recent Japanese history.

The Nikkei 225 index of leading shares hit its lowest point for three years last week. It has now lost more than 60 per cent of its value in 1989 in an increasingly rapid decline that has knocked a third off its value over the past year.

"There is a feeling of doom and gloom," said one Tokyo dealer. "And there is a gut feeling among investors that the market is still overvalued despite the recent falls. The sell-off has not finished yet." Hopes that the market had hit bottom when prices rose late last week were shattered by a further retreat on Friday.

Overseas investors are taking advantage of the strong yen to get out of Japanese equities while they can still show a profit in their home currencies. But the main selling pressure has been coming from Japanese institutions such as insurance companies and banks, which have been liquidating their holdings to meet commitments.

The Nikkei 225 index is now edging perilously close to the 14,000 level that triggered an emergency government rescue package for the financial markets in 1992. Two weeks ago, however, a government attempt to reassure the markets with special measures backfired when investors dismissed it as too little too late. Conflicting pronounce- ments from different government departments in recent weeks have also done nothing to steady the market's nerves.

Much of the current pessimism is caused by the strength of the yen, currently standing at 135.96 against the pound, which is undermining the profit performance of much of Japanese industry.

The falling stock market, however, threatens to set off a full-blown banking crisis as the large equity holdings of banks lose their value. The banks are already seriously weakened by huge bad debts from the 1980s. Their shareholdings are counted towards the banks' capital adequacy, but analysts calculate that if the Nikkei falls below 14,000 the capital of many banks will fall below the agreed international limits for capital.

As share prices fall, the banks and other institutions will be forced to sell more of their holdings, depressing prices and weakening banks still further.

The official response would be to support the banking system, but there is already strong popular opposition to the idea of public money being squandered on bailing out banks. This found graphic expression in April, when Yukio Aoshima, a TV comedian and writer of sentimental novels, beat professional politicians and former bureaucrats to be elected governor of Tokyo. His only clear policy was to withdraw city money from two high- profile bureaucratic spending projects, including a scheme to bail out a pair of bankrupt and scandal-ridden credit unions.

There are strong indications that the public is disillusioned with government policy which, since 1992, has diverted public money such as post office savings accounts into its Price Keeping Operation to support the financial markets.

Pessimism is heightened by Japan's underlying economic weakness. Prices are falling and unemployment has risen to nearly 3 per cent, which is very high for the country. Despite earlier forecasts of improving company profits this year, industry is seeing profits slide for the third year running. For the first time in 70 years, the Japanese gross domestic product is likely to have fallen over the last three months.