Turmoil reaches Japan as shares hit two-year low

The Japanese stock market, which has weathered some of the worst turbulence in other Asian markets, started looking very shaky yesterday as the blue chip Nikkei 225 index dropped to its lowest point in two years. Stephen Vines in Hong Kong sees the plunge in Tokyo as particularly worrying because it was linked to some fundamental concerns about the very structure of Japan's financial markets.

Yesterday's share price fall of more than 4 per cent took the Nikkei below the psychologically important 16,000 level and to its lowest point for two years. The yen is also weak, now trading at just below 123 to the dollar, a level widely regarded as way below a satisfactory exchange rate.

The impetus for yesterday's share plunge was a possibly erroneous report that the powerful Bank of Yokohama was unloading its share holdings in several leading companies.

Cross share holdings underpin Japan's stock market. Any suggestion that this form of share ownership might be unraveling is enough to cause serious dismay among equity dealers.

Investors are rapidly loosing confidence in the Japanese banking sector. On Thursday bank shares fell to their lowest point in eight years. Yesterday's further sell-off of bank stocks took the Topix banking index down to its lowest point since February 1985.

The banks are squeezed by bankruptcy fears, which are likely to saddle them with bad debts, and a generally pessimistic view of the business climate. Reports of bankruptcies have risen consecutively for the past eight months. On Monday Sanyo Securities filed for court protection, providing a high profile focus for these bad debt fears.

Japan's woes are not helped by very troubling news from neighbouring South Korea, where the Seoul stock exchange notched up a record decline of 6.9 per cent yesterday on fears that the local currency was going into free fall. Despite repeated central bank intervention throughout the day the Korean won still closed 0.6 per cent down. Both international and domestic investors seem to believe that further falls are inevitable.

The only Asian market to show signs of optimism yesterday was the battered stock exchange of Thailand which managed a 3 per cent rise on hopes that the current government would finally step down and be replaced by an administration which would do something about the financial crisis.

Meanwhile in Hong Kong, four days of straight declines have left the blue-chip Hang Seng Index down 10 per cent on the week, falling almost 3 per cent yesterday. Even a very bullish International Monetary Fund report on the Hong Kong economy and the government's fiscal policy failed to persuade investors that the outlook is good.

Their vision is firmly fixed on the worrying high level of interest rates which are inching up as the government mobilises its defences against fresh speculative attacks on the Hong Kong dollar. The crunch could come soon as many of those speculating on the dollar's fall have contracts which come to fruition at the end of the month. They are unlikely to wait until the last moment to try to push the currency down.