View fron Tokyo: Shark-infested waters and no lifeguard in sight

The shark alerts have gone up over the Tokyo Stock Exchange. Just when investors thought it was safe to enter the water again stock prices have begun to tumble, and even the adventurous have turned to flee back up the beach after barely putting their toes into the waves.

Adding to the general dismay is the fact that the self-appointed lifeguard until now, the ministry of finance, is nowhere to be seen.

In the past two weeks the Nikkei 225 stock average has dropped 8.5 per cent from 20,309 to an eight-month low of 18,590. This was not meant to happen. With semi-official government backing for the market, the Nikkei has been bouncing harmlessly between 19,000 and 20,000 for months after scares last year of a meltdown in the stock market were averted by strong ministry intervention.

The trouble began, as usual, when least expected. On 26 October 1.4 million shares in East Japan Railway were floated on the Tokyo exchange, priced relatively cheaply in the hope of attracting small investors back to the market.

Retail investors were badly burnt by the crash of the Tokyo market in 1989 and since then have largely stayed away from stock investments. The listing was the biggest new issue since the mammoth Nippon Telegraph and Telephone float in 1987 and had attracted considerable interest.

The shares were priced at 380,000 yen and quickly shot up to 600,000 yen in the first day of trading. Then two things started happening. Traders switched from rapid buying to rapid selling to take quick profits, and the exchange's computerised trading system proved unable to take the volume of business.

Computers in the Osaka exchange suffered the same problem and orders had to be taken over the telephone and executed manually. What had been planned as a public relations boost for the stock market turned into a disaster.

Traders were particularly critical of the fact that the Tokyo exchange's computer system, installed only two years ago, was so quick to crash, forcing them to the undignified extremes of using telephones and pens and paper.

Things have since gone from bad to worse. Another initiative which was supposed to boost confidence in the market appears to be having the opposite effect, and it has not even come into use yet.

NOT REPRESENTATIVE

For some time the ministry of finance has been unhappy with the Nikkei average, the most commonly used stock index of the Tokyo exchange. It is made up of 225 stocks originally chosen in 1949, and the ministry has argued that these companies are not necessarily representative of the full spread of Japan's economy in 1993.

But the real irritant has been the fact that the Nikkei is computed by a simple average with relatively smaller, undertraded stocks having the same value on the index as corporations with many times their capitalisation. This has meant that arbitrageurs have been able to make huge profits by trading futures contracts and at the same time buying or selling the stocks of some smaller companies to manipulate the value of the index.

The fact that the most successful arbitrage traders were American added to the ministry's discomfort.

There is also the Tokyo Stock Price Index, or Topix, which includes all 1,227 companies on the first section of the exchange. But although analysts say Topix is a good guide to the underlying trend of the market, it is largely used just as a guide, and trading in its futures contract is only a small fraction of that in the Nikkei 225.

As a response, the ministry has dreamt up the Nikkei 300, an expanded index that has an updated list of representative stocks. And, in an attempt to outwit the 'arbs', the 300 index is weighted according to the market capitalisation of the listed companies, which should make it less easy to manipulate.

Some 155 shares from the Nikkei 225 will be carried over to the 300 index, the rest will be new. Dropping out are old-fashioned stocks such as Japan Wool Textile and Sumitomo Coal Mining.

JITTERY REACTION

Newcomers include Daiwa Securities, the Seven-Eleven convenience store chain and two computer games companies, Nintendo and Sega Enterprises.

Although trading in a Nikkei 300 futures contract is not expected to begin until next year, the optimists in Tokyo's financial markets were predicting that investors would begin buying up the 145 new stocks not included on the old Nikkei 225 to prepare their portfolios in advance.

But what appears to have been happening is the exact opposite. Investors have simply been selling off the 70 old stocks on the Nikkei 225 that will not be included in the new index. Together these have lost about 13 per cent of their value in the past month.

With so many sharks circling in the water, it is not surprising that the ministry has become a little jittery and temporarily suspended its so-called 'price-keeping operation' by using public pension fund money to prop up the market. Foreign investors appear to have begun selling stocks, the bad round of corporate results just announced has further depressed the market and analysts say it will decline further in the coming days or weeks.

And just on time, as if beckoned on stage by a manic horror-movie director, came Muramoto, a man- eater of a size not seen in Japan since the war. Muramoto is, or was, a construction company, the 23rd largest in Japan, until it filed for bankruptcy last week. Its total debts were put at 590 billion yen, ( pounds 3.7bn), which made it the largest bankruptcy in modern Japan.

The reasons for Muramoto's crash were all too familiar. It embarked on a binge of golf course developments and other speculative investments at the height of the bubble economy at the end of the 1980s, amassing huge debts that it could no longer service. But what was interesting was the decision by its creditor banks to pull the plug.

Japan's banks are carrying billions of pounds of bad debts from the bubble years, largely from failed property investments, but have so far preferred to keep rolling over the loans in the hope that when the economy picks up again they will finally be repaid.

Muramoto seemed to indicate that, at least in some cases, the banks are starting to take a more realistic approach to the shark-infested waters that surround them.