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Japanese Stock Index Plunges to a Five-Year Low

By Paul Blustein
The Washington Post

TOKYO

Japan's major stock index plunged 3 percent yesterday to its lowest point in five years, adding to fears that the nation is headed into a severe slowdown that could put a drag on world economies .

Since it began to slide in December 1989, the closely watched Nikkei stock index now has lost almost half of its value, dropping through the symbolic 20,000-point level to close yesterday at 19,837.16. Its dramatic decline is continuing at the same time that Japan's political and financial elites are threatened by scandals.

"The cozy consensus is starting to come to terms with reality," said Kenneth Courtis, an economist with Deutsche Bank's Tokyo office, referring to the once-common belief that Japan would undergo little more than a brief pause in its supercharged economic growth.

Many experts are now predicting that the Japanese economy is slowing to around 2 percent annual growth this year, compared with more than 5 percent during the 1988-90 period. Although a labor shortage has kept unemployment from growing, economic growth any less than 3 percent is considered a recession here.

Japanese companies, many of which are facing sharply lower profits, already are adjusting to new economic realities, curbing spending on plant and equipment and research and development. One of the companies showing sudden weakness is the electronics giant Sony Corp. "Suddenly, starting around last November, everything was declining," said Sumio Sano, a Sony director, following the recent disclosure of Sony's expected loss for the current fiscal year, which ends March 31.

As the demand for imports by Japanese consumers and companies has tailed off, the nation's politically sensitive trade surplus is rising to record levels. That is a disappointment for the Bush administration, which has looked to Japan to stimulate the sluggish world economy.

The market's decline also adds to concerns about the health of Japan's giant banks and insurance companies, which have been major suppliers of international capital over the past decade. As the value of their stock holdings shrivel, the companies become less willing and able to lend and invest overseas. Coupled with these financial setbacks is a financial market scandal in which several brokerage firms were found to have been shuffling stocks from one client to another in an effort to keep them from reporting losses.

Last week, the president of Daiwa Securities Co., Japan's second-largest firm, resigned when his company was forced to absorb hundreds of millions of dollars in losses as a result of the practice, and many medium-sized firms are believed to face even more serious losses that may threaten their survival.

Also weighing heavily on the market's mood are bribery scandals that some experts say could eventually bring down the government of Prime Minister Kiichi Miyazawa.

Many analysts had voiced fears that panic would ensue if the Nikkei penetrated the psychologically important 20,000-point level, but traders reacted with calm when, shortly after the start of the afternoon trading session Monday, the index dipped into the "teens."

One Japanese television network reported that the big moment produced "no panic -- just a silent stupor" on the floor of the Tokyo Stock Exchange. Trading volume remained light -- an estimated 200 million shares changed hands all day -- and the market rallied briefly to pass the 20,000 level again, then fell back again to close at the lowest since Feb. 20, 1987.

(The market staged a modest rally in opening trading Tuesday morning.)

A number of analysts said they agreed with government officials who predicted that the dip would prove to be a short-term phenomenon caused by the desire of big firms to take some profits and clear out their portfolios of unwanted shares before the end of the fiscal year on March 31. According to this optimistic scenario, buying demand will resume in April after the major investors set their purchasing goals for the new fiscal year.

"People have apparently decided that this year-end will be bad, and they have a saying in Japan -- "If we all cross the bridge together, it's not frightening,' " said Robert Feldman, an economist at Salomon Brothers Asia.

Top politicians in the ruling Liberal Democratic Party (LDP) nevertheless are clearly worried by the market's weakness, and calls intensified Monday for the Bank of Japan to stimulate the flagging economy by lowering government-influenced interest rates. Shin Kanemaru, the LDP vice president, and Noboru Takeshita, a former prime minister, have recently been urging an easier-money policy.

Ruling party officials also said they are likely to enact a supplementary public works program in coming months to help boost growth. "People's confidence in the market has been shattered," Ian Moore, associate director at Toyo Trust International told Bloomberg News Service. "It's not a pretty picture at the moment."

The anxiety stems from the bursting of Japan's financial "bubble," which drove stock and land prices to astronomical heights in the late 1980s as the economy zoomed. The Nikkei reached its peak of 38,915.87 in late December 1989.

The deflation of the bubble is chiefly the responsibility of Bank of Japan governor Yasushi Mieno, whose tight-money policy has been aimed at squeezing speculators to prevent a general inflation. While Mieno's efforts have earned him respect both at home and abroad, he is coming under increasing attack for having allegedly kept interest rates too high for too long.