NIKKEI down again:
WSJ - December 23, 1997
Japan Stock Market's Plunge
Threatens Its Crucial Economy
TOKYO -- Japanese stock prices extended a three-session plunge to
11%, threatening the health of the world's second-largest economy and
perilously draining confidence in its financial system.
By Wall Street Journal Reporters Jathon Sapsford, Norihiko
Shirouzu and Bill Spindle
The stock-market rout underscores a deeply unsettling message: Despite
enormous cash reserves and consistent trade surpluses, Japan isn't immune
from the economic sandstorm besetting many of its Asian neighbors.
Like its neighbors, Japan suffers from a weak banking system, a heavy
dependence on foreign capital in its markets, a sunken property market
and now a shortage of credit that has corporations gasping. Worse, just as
the financial markets rejected half-measures aimed at shoring up South
Korea, Thailand, Indonesia and Malaysia, the skittish markets are signaling
a flat rejection of Tokyo's trumpeted package last week to slash taxes,
sponsor loans to small businesses and throw $77 billion at the banking
problem.
"We're in a very dangerous state," says Okiharu Yasuoka, a senior
member of Japan's ruling Liberal Democratic Party and chairman of the
government's financial stabilization committee.
Even the country's powerful central bank is stymied by market conditions.
With the yen edging lower, echoing the currency slides elsewhere in Asia,
the Bank of Japan last week spent as much as $5 billion, according to
estimates in the market, to support the Japanese currency, with only
limited success. The intervention, according to senior bureaucrats, is meant
to ward off criticism that Japan was allowing its currency to slide to boost
competitiveness against Asian exporters.
Global Implications
Unlike the other economies that have slumped as the so-called Asian
contagion has spread, Japan's economy is a powerful world force. In a
report released over the weekend, the International Monetary Fund
warned that a serious slowdown in Japan could set back global growth.
It certainly would compound Asia's problems mightily. Joseph Yam, the
chief executive of the Hong Kong Monetary Authority, said over the
weekend that the speed of Asia's recovery depends in large part on how
quickly Japan can reinvigorate its banking industry. Senior LDP officials
say other Asian leaders are pleading with Tokyo to keep the money
flowing from its banks, which had more than $250 billion in relatively
inexpensive loans outstanding in Asia at the end of last year.
If the banks were to start pulling those loans out of Asia, it could devastate
already hobbled economies around the region. The alternatives aren't
much better: Japanese financial institutions own some $350 billion in U.S.
Treasury bonds, which they could liquidate to raise money -- but at a cost
of higher U.S. interest rates.
The pressure on Japanese banks and insurance companies is escalating
rapidly, though. The benchmark Nikkei Stock Average fell 3.4% Monday
to 14799.40, bringing its cumulative loss over the past three trading
sessions to 11% and leaving the index at its lowest point in more than two
years.
In a sign that investors are pinning the blame for the markets' problems on
the financial sector, bank shares are losing value faster than any other
sector. Japan's banking sector amounted to 23% of the country's stock
market a year ago. It was 17% three weeks ago. On Monday, banks
amounted to 16% of Japan's stock market. Since Friday, the overall
market has lost $148 billion in value.
Vicious Circle
Japan is caught in a vicious circle. Deep problems in the banking sector
are driving share prices lower. But Japan's banks themselves are among
the country's biggest shareholders, and as the value of their portfolios falls,
so does their ability to lend, thanks to a rule that allows them to count
stock holdings as capital.
Shrinking capital means banks would have to cut back on loans to squeeze
into internationally agreed-upon levels of capital reserves equal to 8% of
loans. Less lending means more bankruptcies and further declines in stock
values. "We're very worried about" the cycle, says a senior Finance
Ministry official.
Indeed, HSBC James Capel (Japan) Ltd. figures the stock portfolios of
nearly half of Japan's big banks are worth less than the banks paid for
them. That means the lenders, including Daiwa Bank Ltd., Fuji Bank Ltd.
and Sakura Bank Ltd., can no longer sell those stocks and use the profits
to write off bad loans. The only solution is to cut back on lending, bankers
say privately, and tighten Japan's credit crunch.
"We're watching this with a sense of crisis," said the LDP's Mr. Yasuoka.
The stock market's fall is especially unnerving, he adds, because it shows
that the government's plan to inject 10 trillion yen ($77 billion) into the
banking industry is doing little to improve sentiment.
Sense of Paralysis
Still -- in a spooky reprise of other Asian countries' early failures to deal
effectively with their problems -- the government seems paralyzed, slow to
follow through with more-specific measures the markets are demanding.
Fears of a credit crunch caused Hiroshi Mitsuzuka, Japan's minister of
finance, to call in Sanwa Bank Ltd. President Naotaka Saeki in an attempt
to scold him and his industry into lending more.
"Understood," Mr. Saeki responded, according to officials familiar with
the situation, and promised to spread the word as he left.
"What a farce," said one banker, on hearing the news.
As policy management, it may indeed seem extreme. But these are
extreme times. Officials and many business executives fear a rash of
bankruptcies if a credit squeeze sets in and stays. "Any company that's
dependent on short-term bank financing might become a candidate for
bankruptcy," says Jason James, equity strategist at HSBC James Capel
(Japan) Ltd., "even if it's perfectly healthy."
Yet bankers are under pressure to clean house. Credit-rating agencies are
downgrading the banks as the market falls. Global money markets raise
the banks' funding costs each time their capital threatens to fall below
international standards. Even Japan's strongest banks, like Bank of
Tokyo-Mitsubishi Ltd., Sanwa Bank Ltd. and Sumitomo Bank Ltd., are
paying a premium over rivals for short-term funding. Thus, international
markets are forcing Japan's banks into more prudent lending. "The
markets have caused them to do this," said the senior Finance Ministry
official.
The Ministry of Finance, meanwhile, said Japan's level of problem loans
edged up from 28 trillion yen as of March 31, to 29 trillion yen as of Sept.
30. Yet even ministry officials now concede that their numbers
underestimate the problem, and plan to come up with new guidelines for
disclosure in January. But the problem, bankers say, is that the timing is
wrong. "They should have done this at the beginning," says one banker.
"Not now, when the problem could get really bad and hurt confidence."
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