WESTERN MARKETS UNEASY. Trouble rumbles in Tokyo
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Morgan Stanley Capital International Perspective, which tracks stock markets around the world, pointed to the slowdown of world stock markets in the second quarter of this year and asked, ``Has the Japanese stock market topped?''Skip to next paragraph
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Business Week, in an editorial this week, cited ``a fashionable theory circulating on Wall Street that a stock market crash, if one comes, is likely to occur first in Tokyo, then drag the US market down.'' The magazine calls this prospect extreme, but says there is a close correlation between US and Japanese markets - and while there is ``no need to panic ... it's right that US investors should pay attention.''
The Wall Street Journal started the week with a prominent article noting that the volatility and speculation in Japan's stock market were causing great concern in the US.
The Tokyo market has rallied in recent days. Even so, there seems to be a growing consensus in the global financial community that the world is moving out of the disinflationary era into an inflationary one, and Japan is quite vulnerable in this new era.
Japan's economy did well in the early years of this decade, when raw material prices were falling. In 1980, says Mr. Hale at Kemper, commodity imports - primarily oil - cost Japan, which is poor in natural resources, 6.5 percent of its gross national product. Last year, he says, with commodities cheap and plentiful in the world (and with Japan's economy having expanded enormously in six years), only 1.6 percent of Japan's GNP was devoted to commodity imports.
Now, Hale points out, commodity prices are rising. The Commodity Research Bureau's index of key goods is up 25 percent from one year ago, and Hale sees Japan's current-account surplus declining sharply by the end of '88 as a result.
Higher commodity prices affect the US, too. But they are balanced by the good they do in the oil patch, the farm belt, and the mining industry. Japan is not hedged in this way.
Hank Sawa, Prudential-Bache's Tokyo analyst, sees ``nothing but a tough market ahead.'' Even domestic industries - which many Japanese felt would replace export-oriented companies as leaders of the Japanese economy - will be hurt in view of the higher commodity prices, he notes.
Another problem for Japan is that the strong yen is constraining Japanese exports. And aggravating worries about the Japanese financial market are at least two ``structural'' problems:
Speculation and inside trading. Japanese corporations often conspire to bid up stock prices. ``Nothing moves that isn't manipulated,'' a crusading columnist for the Japan Economic Journal has charged.
Many nonfinancial corporations make stock trading a primary profit center. As these corporations benefit from higher stock prices, their own stock rises, creating a kind of skyscraper house of cards. A major hit to the market could bring down all sorts of companies in one fell swoop.
Then there is the concern over price-earnings. This is a good indicator of speculation. One year ago, the average price of Nikkei stocks was 30 times earnings. Prices are now 50 to 60 times earnings. By contrast, in the US, prices are about 18 times earnings.
Paul Aron, a well-regarded specialist on Japanese P-E's who is with Daiwa Securities, contends, however, that in adjusting for accounting differences and other factors, Japanese P-E's are not that far above the US. But they are still remarkably higher today when compared with past P-E's in Japan, other analysts note.