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Tuesday, September 03, 2002


The latest news and economic data from Tokyo continue to cause concern. Yesterday the Nikkei average dropped 1.67 percent or 159.10 points to 9,362.53 after touching in one moment an 18 year low at 9,269.10. On November 10, 1983, it closed at 9,244.24.In part this downward movement is provoked by uncertainty concerning the immediate outlook in the US (and now in Europe judging by the latest survey data on August manufacturing). In part the fall is a reaction to talk of plans for large scale tax cuts, when it is absolutely clear that reducing government debt has to be high among Japan's priorities. And in part the move is a reaction to the continuing doubts about the real health of the Japan business sector as evidence accumulates that all is not what it seems.

It is hard to identify precise tipping points for Japan's agony, but in the past I have pointed to one indicator - a Nikkei below 10,000, for its feedback effects on the value of bank assets - as a possible candidate. Every day the Nikkei stays below that level marks one more day in which Tokyo moves a little bit nearer to the brink. Another possible candidate is obviously government debt, which continues to increase rather than decrease. My view is that no-one really has a firm, agreed figure for the value of Japan government debt as a percentage of GDP. In part this depends in what you count as debt. However for a long time now a widely quoted figure has been stuck at 130%. Well in this piece from the Reuters on Yahoo News they suggest the value is now 140% (remember with deflation the real value of debt automatically rises), so perhaps the stakes just went up.

It was only a matter of time until we fell this low," said Masanori Hoshina, head of global portfolio marketing at BNP Paribas. "Part of our weakness lies in concerns about the cloudy economic outlook in the U.S. But the key problem is that there are still no signs of a sustainable economic recovery in Japan," he added. Data on Friday showed the Japanese economy grew at a faster-than-expected 0.5 percent in the April-June quarter, but industrial production fell unexpectedly for the second straight month in July and other data showed deflation worsening. Declines in prices make it harder for Japanese companies to service their mountains of debt, adding to pressure on banks. High government debt levels are also a worry. "With a public debt of around 140 percent of GDP, the Japanese government doesn't have many cards left up its sleeve," said Hiroshi Nishiyama, senior portfolio manager at SG Yamaichi.

Against such a backdrop banks were pummelled. Mizuho Holdings Inc, the world's largest bank by assets, plunged 7.23 percent to 231,000 yen and was the highest traded issue by value on the first section of the Tokyo Stock Exchange. Rival UFJ Holdings Inc slipped 4.18 percent to 252,000. Japan's megabanks have large holdings of stocks on their books and falls in the stock market eat into their capital base, increasing fears of financial instability.

Another notable loser was Tokyo Electric Power Co Inc (TEPCO) , which extended its losing skid to six straight sessi ons and was down 1.46 percent on the day at 2,360. Shares in Japan's biggest power utility have come under heavy pressure since it said last week that it may have failed to accurately report cracks in its reactors. Traders say that a string of recent scandals in corporate Japan has helped undermine market sentiment and depress trading volume in recent weeks.

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