Tokyo's Market Plunge May Prompt Reforms

Analysts say companies must raise dividends to attract investors

PRICES on the Tokyo Stock Exchange, like the petals now floating off the blooming cherry trees in Japan, are spiraling down to sudden lows.

Few analysts can agree what has driven the world's second largest stock market back to its pre-boom levels of 1986, making it even more difficult for Japanese officials to know how to stem this massive plunge in assets.

For now, the Finance Ministry, which has often guided the market in the past, prefers just to watch the 225-member Nikkei stock index continue in a natural free-fall of selling, confident that a stalled economy is on the mend.

"The Japanese government does not seek any quick fixes now," Finance Minister Tsutomu Hata told reporters on Wednesday. "Please ask the stock market about the market."

Rather, officials are awaiting the full impact of a drop in the official discount rate. The rate was dropped by 0.75 percent - the largest amount in more than a decade - to 3.75 percent on April 1, a day after the government launched an accelerated spending program.

These steps, however, were not enough to meet expectations of investors, who now worry about how to find the bedrock in the index that will mark an end to a long fall from the speculative highs of the late 1980s. (Impact on US markets, Page 8.)

The once-solid "floor" of 20,000 points was broken last month, and the market has been in a tailspin ever since, breaking through 17,000 yesterday to end up at 16,598. That is down nearly 30 percent from the first of the year and 57 percent off the record high of late 1989.

"At this rate, there will be no market at all within a month," says Russell Jones, analyst at UBS Phillips and Drew International.

But, he predicts, positive shifts in domestic policy and an economic recovery in the United States will lift the Nikkei back to around 20,000 within three months. Finance Ministry officials forecast a 24,000 range.

Many analysts say the trigger for the recent downward spike was massive selling of Nikkei index futures on the Singapore International Mercantile Exchange.

Others say the cause lies in corporate projections of lower profits and reduced capital spending, with investors not knowing how to evaluate stock values of sluggish firms.

Leading the recent plunge have been the stocks of Japanese banks, once the darling of investors and the backbone of Japan's cheap credit, but which are now seen as vulnerable to the market decline and to new international rules on reserve capital.

Japanese banks are under pressure to meet requirements set by the Swiss-based Bank of International Settlements (BIS) to increase their capital adequacy ratios to 8 percent by March 1993. The battered stock market has reduced the banks' capital assets and, in turn, the appeal of their own stocks.

Some analysts say that if the Nikkei hits 16,000 and hovers there, many banks could lack the assets to meet BIS goals.

Lending by 11 of Japan's city banks will decline 20 percent to 30 percent in the coming year, the Nikkei business newspaper reported yesterday. One bank, Sakura Bank, failed to meet the BIS requirement at the end of March.

With both the stock market down and banks less able to lend, the need for new sources of capital will bring a boom in corporate bonds, many analysts say, with some chance that junk bonds will be used in Japan. Other basic changes in the market may result.

Some analysts say Japanese companies will now need to raise their traditionally low dividends up to Western standards in order to attract investors. Another change in the wind is an unloading by some firms of shares in firms with which they do business. This cross-shareholding within groups of companies has given Japan industries a unique advantage in world markets.

This market crisis also shows that the government's role can be minimal. One reason is a rupture last year in the close ties between the four big securities houses and the Finance Ministry, triggered by a series of market scandals.

"The ability and willingness of the ministry to prop up the market has disappeared," Mr. Jones says. "They can't go making the Japanese equity markets look different from the rest of the world."

Still, the ministry is weighing a possible easing of rules to allow companies to purchase their own shares. While this may revive the stock market, it could lead to insider trading and price manipulation.

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