WHEN United States President George Bush and Japanese Prime Minister Toshiki Kaifu meet Friday and Saturday in Palm Springs, Calif., they are going to have far more on their agenda than just bilateral trade - the immediate reason for their meeting. Both leaders will also be keeping a wary eye on their respective stock markets which - over the last several years, at least - have tended to move in the same direction. To scan a chart of the Standard & Poor's 500 stock index since 1986 and then glance at a chart of the 225-share Nikkei stock index is to get a quick lesson in the meaning of ``deja vu.'' The two charts look much alike.
Since Japanese stock prices have been falling fast in recent weeks, a continuation of that pattern would mean a downturn for US share prices - and possibly other major global stock markets. Stock prices around the world fell together in October 1987.
On Feb. 26, the Nikkei index plummeted 1,569.10 points to close at 33,321.87, a 4.5 percent drop and its second largest one-day fall ever. Since the end of last year the Nikkei has fallen 10.3 percent, reflecting apprehension about rising inflation stemming from the falling value of the yen, as well as unease about the long-range role of the ruling Liberal Democratic Party. The party, Japan's largest, held on to its majority status in recent elections for the lower house of Japan's Parliament. But it saw its rivals score substantial gains.
What worries some analysts is that negative political or economic economic news could help shove the two stock markets back into similar paths once again.
Both Wall Street and the Tokyo market will probably react to the results of the trade negotiations now underway between the two nations, says Steven H. Nagourney, an analyst with Shearson Lehman Hutton Inc.
The Dow Jones average registered a basically downward course last week, losing 71.40 points to wind up at 2,564.19.
This week started off a little better. Despite the sharp drop in the Tokyo market on Monday, Wall Street (and overseas) investors did not immediately take to their telephone hotlines to initiate sell orders. ``The real test was at the opening bell,'' says Larry Wachtel, an analyst with Prudential Bache Securities Inc. There was no major selling, Mr. Wachtel notes. The Dow Jones industrial average closed up 38.29 points on Monday, at 2,602.48.
The London stock exchange closed up 12.6 points with the Financial Times index at 2,249.4.
For Wall Street, Wachtel believes that the ``cutoff point'' for the Nikkei is around 30,000. If the Nikkei fell through that level into the 29,000 range, then, says Wachtel, the Dow would probably head south too.
Lacy H. Hunt, chief economist with Carroll McEntee & McGinley, Inc., warns: ``A significant downturn in the Nikkei Dow would cause Japanese investors to reduce their US investment positions and move funds back into their own falling markets.''
That's because Tokyo is a ``highly leveraged'' market, says Hunt. To meet margin calls back home, Japanese investors might liquidate some of their substantial holdings abroad, much of it invested in the US bond and equities markets. Hunt is ``encouraged'' that other markets, such as New York, did not immediately follow Tokyo on Monday.
The key to the course of the Nikkei, he says, will be the value of the yen. If the yen continues to show weakness against the dollar, the Nikkei will probably fall further, he adds. And if Japan's central bank raises interest rates to help shore up the yen, that would put pressure on the Federal Reserve Board here to raise domestic interest rates. Such a move risks pushing US into recession.
Arnold Moskowitz, director of investment strategy for County NatWest (USA), an investment banking house, notes that ``Japan provides much liquidity for the US.'' And Europe would be even more threatened by a slumping Nikkei, he says, since Europe needs substantial liquidity to finance not just European economic unification in 1992, but the expected political and economic reunification of Germany.