Fall in Land Prices May Follow Japan's Stock Price Drop

WHEN Ichiro Isoda was forced to resign last Sunday as head of Japan's most profitable bank, the government claimed its biggest victim in a year-long assault on land speculation. His fall from the pinnacle of Japanese banking is seen by some analysts as a sign that Tokyo land prices may soon follow the nearly 50 percent decline in the Tokyo Stock Exchange this year.

Any rapid drop in land prices, however, would jeopardize Japanese investments abroad and send shock waves through the world economy.

Mr. Isoda, chairman of Sumitomo Bank, was the nation's leader in scooping up profits from a spectacular rise in land values since 1986. His philosophy that ``profit is everything'' drove management to make the bank No. 1 in the percentage of loans tied to purchases of property. Isoda resigned as a matter of ``moral responsibility'' after the government arrested one of his former branch heads last week for making $174 million in illegal loans to speculators. Such aggressive lending by Sumitomo and many other Japanese banks helped to drive up land prices in the country's major cities. In Tokyo, for instance, the average price for a square yard of land is now about $6,000.

Using their real estate as collateral, many companies and individuals borrowed heavily to invest in stocks, doubling the Nikkei Index over four years by the end of 1989. About 50 percent of Japanese corporations hold land without intending to use it, according to a recent National Land Agency survey. But speculation in both stocks and land has begun to create resentment among landless Japanese as well as anger in other countries. Japanese companies have made controversial buys of prominent foreign properties, the most recent being Pebble Beach Golf Course.

Many foreign analysts predicted that the ``bubble of over-inflated prices'' in stocks and land would eventually burst. They noted that the stock market's price-earning ratios were 3 to 4 times higher than in Western markets.

Hoping to arrange a gentle deflation of the two markets, the Ministry of Finance and other agencies began a slow assault in late 1989, altering regulations, shifting tax burdens, launching probes, and trying to get banks to stop lending to speculators. The Bank of Japan began to step up interest rates, after having kept the cost of money low for several years.

But such government moves helped to create a decline in the stock market that was too rapid and disorderly, says Bank of Japan Governor Yasuhi Mieno. In addition, some of the probes began to reveal close ties between leading politicians and speculators who provide them with campaign money.

When the Nikkei Index dipped below 20,000 points on Sept. 28, registering a nine-month decline from nearly 39,000 points, the Finance Ministry loosened some of its regulations. That helped to stabilize the market, but the threat of war hanging over Japan's vital oil supplies in the Middle East has made stocks volatile. Some foreign analysts say the market would need to drop to 18,000 to achieve price-earnings ratios like those in the United States.

Any evidence that land prices are about to collapse is still hard to find. The most recent survey by the National Land Agency showed a 13.2 percent average increase in residential land prices over the year ending last June 30, the highest rate in two decades.

But land prices in other cities were flat, the survey showed. And the drop in stock prices may force investors and banks to start selling properties to make up for losses on the stock market or pay for stock purchased on credit. Stocks of land-related companies are under special distress.

Most of all, the Sumitomo incident is likely to send clear signals to other banks that the government is serious in curbing loans to real estate companies. ``I hope that not only Sumitomo but also other banks will establish sound management systems and thorough discipline for their employees,'' Finance Minister Ryutaro Hashimoto told reporters.