Japan's Stock Market Rides Roller Coaster

AFTER losing half its value in the past three years, the Tokyo Stock Exchange had no problem coping with this week's surprise split-up of the ruling party that guided Japan's postwar economic marvel.

Stock prices were due for a correction anyway, many analysts say, and last Friday's no-confidence vote against the Liberal Democratic Party (LDP) provided the excuse for a curative dip on Monday that was the largest daily decline of the year.

The 225-issue Nikkei Stock Average fell 592.11 points to 19,212.43. But much of that loss was regained yesterday as investors welcomed the entry of a new pro-business, conservative political party under former Finance Minister Tsutomu Hata.

In fact, the market's prospects may brighten in the long term if that party, Shinseito (New Life Party), wins power and puts through income-tax cuts, market openings, and other changes that businesses and consumers favor.

"In the long term, this political turmoil is going to be good for Japan. Policies will basically be the same or even better," says Kathy Matsui, strategist at Barclays de Zoete Wedd Securities (Japan) Ltd. in Tokyo. Investor uncertainty may linger until the lower house election on July 18.

For now, after a roller-coaster year, the market appears in a drift with thin trading volume. On March 31, 1992, at the end of Japan's fiscal year, the Nikkei stood at 18,591.45, down 3.9 percent from a year earlier. But on Aug. 18 it went into a near free-fall and reached a low of 14,309.41, marking the deepest point of Japan's still-unfinished recession.

That plunge brought government-to-market resuscitation in the form of two giant economic stimulus packages, including the spending of trillions of public yen to boost stock prices and a virtual government guarantee to keep them high.

Without those steps, Japanese banks, which suffer from bad loans and rely heavily on stocks for assets, would have come up short in meeting the March 30 deadline for new, higher international standards for asset reserves.

SINCE then, as a few signs of economic recovery were sighted, the market went up again and almost broke the 21,000 barrier. "We had a run-up very quickly but it failed to break the barrier because the economy actually proved to be weak," says Geoffrey Barker, analyst at Barings Securities (Japan) Ltd. "The market stayed up due to a perverse confidence in public money. And investors were pleased that the market was up even while the yen was rising. It was a very odd, unnatural market. The political events

broke that contradiction."

Not until private consumer spending rises from its low levels, signaled first by housing starts and mortgage applications, will the economic recovery be under way. "The key is what consumers will do. Savings are way up, despite inflation coming down. People are still cautious and are waiting to see stability in property prices," Mr. Barker says. "If you could encourage them to save a little less, you will see a recovery."

Economists are divided about whether the recession is over, or if the economy is just bumping along the bottom. "With both the economic and political situation still unclear, investors are looking at technicals and charts right now, and the feeling is that the lower limit on the Nikkei is 18,500," Barker says.

Infusions of public funds, estimated at about $9 billion alone this week, are a distortion of the market, but they have been there so long that they now are seen as a constant distortion, offering a floor to drastic drops.

Foreign investors reduced their interest in the market this spring. One reason may be that the price-to-earnings ratio, traditionally high in Japan due to the delayed profits of companies, has shot up during the recession. Hideaki Akimoto, chief strategist at Daiwa Institute of Research, says that corporate earnings for the previous fiscal year were off nearly 30 percent. A further drop is expected this year, making Tokyo stocks overvalued. Prices may be about 80 times earnings.

"These high ratios don't worry foreigners who look for a high earnings in a few years," Ms. Matsui says.