BOSTON — LIKE a roller coaster, the Tokyo stock market hurtled down a steep hill, climbed back up, and headed down yet again this week. The activity is reinforcing concerns about the long-run financial implications for the US of Japan's deflating stock-market bubble this year.
One such fear is that it could slow the crucial flow of Japanese capital abroad, including into US Treasury securities. In buying these securities, the Japanese have underwritten a substantial portion of the US budget deficit.
If the Japanese pull their money back, long-term interest rates in the United States could rise as businesses here compete with the federal government in the chase for investors' dollars.
``The real danger would be a crash in the Japanese real estate market,'' says Sam Nakagama, a New York economic consultant. ``Real estate is more basic in Japan than the stock market.''
James O'Leary, an economic consultant with the United States Trust Company, sees ``clear evidence'' that Japanese commercial banks are in trouble as a result of weakening stock prices and stagnant real estate prices. ``We could have a major crisis evolving from this thing,'' he says.
On Oct. 1, the Nikkei index of major Japanese stocks tumbled through the 20,000 level for the first time since early 1987. This prompted the Ministry of Finance to announce a package of emergency measures to support the stock market. The index quickly moved above 20,000 again, yet closed down 761.64 points for the day. That meant the Japanese stock market had plunged 48 percent from its peak at the end of last year.
Then on Oct. 2, propelled by the government support, the Tokyo exchange soared upward for its biggest one-day gain in history. The Nikkei average of 225 stocks leaped 2,676.55 points, or 13.24 percent, to 22,898.41.
At the end of trading Oct. 3, the Nikkei average fell 49.02 points from Tuesday's close.
The price moves in Tokyo have had little impact on the New York Stock Exchange. Most American analysts saw Japanese stock prices as grossly inflated until their tumble this year knocked off the equivalent of $2.1 trillion in value. This has restored the Big Board as the premier stock market in the world.
With financial troubles and rising interest rates at home, Japanese investors have been buying fewer US government securities this year. The net private inflow of foreign money, a large chunk of it Japanese, into US federal paper was $43.7 billion last year. But this flow fell to an annual rate of only $7.5 billion in the first quarter of this year and a $16 billion annual rate in the second quarter. Dr. O'Leary guesses that the inflow was negative in the third quarter just ended.
However, the agreement between the Bush administration and the Congress on a budget package, which is supposed to slash the deficit by $500 billion in the next five years, is expected to offer some assurance to foreign investors.
``It is one less argument for pulling money out,'' notes Scott Pardee, vice-chairman of Yamaichi International (America) Inc. in New York.
Last month some Japanese banks and other financial institutions were taking back funds from the US and elsewhere to improve their balance sheets for semi-annual reports based on Sept. 30 numbers. It will be another six months before such ``dressing up'' of financial statements is likely to occur again, notes Mr. Pardee.
Michael Keran, chief economist of the Prudential Insurance Company of America, holds that the best single measure of the inflow of foreign capital into the US is the size of its international payments deficit. As long as US trade in services, goods, investments, and other factors is in the red, foreigners as a group have no choice but to place their extra dollars in the US.
The US current-account deficit has declined to an annual rate of $87 billion in the second quarter of this year from $115 billion a year earlier. So foreign money was flowing into the US at that $87 billion rate. But that number doesn't indicate where (stocks, bonds, real estate) it was being invested (``habitat preference,'' in the language of economists) or what country the money was coming from.
If one foreigner bails out of a US investment, the dollars he earns must eventually be sold to a foreigner on the foreign exchange market. If enough foreigners want out, the foreign exchange rate of the dollar will fall. At some point US exports will increase and US imports decrease, reducing the international payments deficit. But this also tends to boost US interest rates, which would not unwelcomed because of the weakness of the US economy.
The Japanese money flowing into the US in recent years has had the effect of moderating interest rates.
Now Japanese banks are struggling with liquidity problems as one of their assets, corporate stock, nose-dives in price. They have been forced to sell US and other assets abroad. Japanese bank branches in New York have been less active in making loans, to the relief of American competitors. If real estate prices fell, Japanese banks would face even more difficulties, the experts note.