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Sunday, March 09, 2003

Nikkei Heading on Down?

If there is one thing I have learnt in following the Japanese economy closely over the last couple of years it is that, as far as Japan is concerned, you should take everything with a big pinch of salt. Still, the Nikkei is at a twenty year low, that is real and that is a fact. This week Forbes suggests it could fall below the 8,000 level, and that with year-end book-balancing in sight. They also mention a figure, 7,500, below which the capital adequacy ratios of the Japanese banks would be threatened. I remember it was just six months ago we were talking of going below 10,000 as being critical, but it wasn't. In all of this one thing is clear. The numbers, except for those relating to bad loans and government debt, continue to get smaller. One day a critical point will be reached and we'll have blow out. When exactly that day will finally come neither I nor any other commentator can tell you. The big danger is that the yawn, yawn, plus ça change effect in Japan might mean that when it actually does come we won't be expecting it. In all of this just be sure that, absent a major and unforeseeable change of trajectory, that day will come, and that the consequences for the global economy will be enormous.

Tokyo stocks could plumb new 20-year lows this week as war worries and a host of domestic factors discourage buyers. Analysts said the Nikkei average could drop below 8,000, a key support level, after falling 2.62 percent last week to 8,144.12 -- its lowest close since March 1983. "Investor appetite has dried up, so I won't be surprised if the Nikkei falls below the 8,000 mark," said Reiko Nakayama, head of the investment strategy division at Marusan Securities. Some investors may look for bargains early in the week, but the market's longer-term prospects are clouded by the prospect of a trade-disrupting war on Iraq, worries about North Korea's missile and nuclear programmes, and a weak economic outlook......Analysts said the Nikkei is likely to move between 7,800 and 8,350 this week. The further prices fall, the more Japanese banks and private pension funds are expected to dump shares in the run-up to the end of the fiscal year on March 31.

With only three weeks to go before year-end book-closings for most Japanese companies, the drop in share prices is bad news for banks, which are saddled with mountains of bad loans, as lower valuations on their stock holdings will erode their capital.

Analysts say many banks' capital adequacy ratios -- a key gauge of financial health -- could fall below the eight percent global requirement if the Nikkei approaches 7,500. At Friday's close, combined unrealised stock losses at the top seven banking groups stood at around 5.84 trillion yen ($50 billion), according to Daiwa Institute of Research. Investors are also concerned about the ability of Prime Minister Junichiro Koizumi to deal with any financial crisis.Friday's arrest of Takanori Sakai, a member of the ruling Liberal Democratic Party, was the latest of a series of political scandals to embarrass reformist Koizumi, whose popularity is fading ahead of nationwide local elections in April. Sakai is alleged to have breached political funding laws.
Source: Forbes

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