Published February 25, 2009

Japan looks to prop up sinking stock market

Government to act as Nikkei slides towards 26-year low; yen also falls

By ANTHONY ROWLEY
IN TOKYO

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THE Japanese government may be forced to intervene in the collapsing Tokyo stock market, Finance Minister Kaoru Yosano said yesterday after the benchmark Nikkei average fell by a further 1.5 per cent towards a 26-year low. Even the strong yen has begun to reverse course as foreign investors pull out of the Tokyo market on crumbling confidence in the Japanese economy.

'It is not desirable that share prices are falling, causing unnecessary consequences,' said Mr Yosano, in a reference to the way the market collapse is undermining Japan's financial system through the impact on bank capital.

'We must think about this, watching market moves,' the minister said after a Cabinet meeting. Officials have been instructed to examine ways of supporting the market, including possibly reviving a government stock-buying agency that was used at a former time of crisis in the 1990s, he added.

The Nikkei average has fallen by a dramatic 20 per cent so far this year and yesterday's 107.66 points drop to 7,268.56 followed a 2.6 per cent fall on Tuesday. The market is now within a whisker of levels not seen since 1983 with no bottom in sight, analysts said.

Investors have become scared by the conjunction of economic recession with possible political crisis in Japan as embattled Prime Minister Taro Aso's government struggles to hang on to power. Problems could also be looming in the Japanese financial sector, as signalled by the bankruptcy of finance company SFCG this week.

Foreign selling of Japanese stocks is one factor behind an apparent reversal of course in the yen, which had risen to multi-year highs against other leading currencies since late last year. Yesterday, the yen fell against the dollar, the euro and the pound as well as against the Australian dollar and others.

Speculators who had taken long positions in the Japanese currency, in expectation that its upward climb would continue as Japanese companies repatriate yen in the run-up to the end of the financial year, were forced to liquidate. Unwinding of yen 'carry trades' that were another factor behind the yen's dramatic surge also appears to have ended, dealers said.

The yen's change of course is of little consolation to Japanese exporters, however, who are faced with a drought of orders from the US and Europe as well as from China and other key markets, economists said.

Industrial output in Japan has collapsed along with exports and is still sliding. Export figures for January which are due out today are expected to show that Japan's overseas sales during the month fell to just half their level a year earlier.

The Japanese economy contracted by 3.3 per cent, or 12.7 per cent at an annual rate, in the final quarter of 2008 and a further double-digit decline is forecast for the first quarter of the current calendar year. The consensus forecast among economists is that Japan's economy will shrink by around 4 per cent overall this year.

Against this bleak background, the government's chances of reversing the stockmarket slide appear slim, analysts said. But the dangers of doing nothing could be real, they add, given the way in which the market slide is undermining the capital base of Japanese banks.

The Bank of Japan (BOJ) has announced a plan to buy up to one trillion yen (S$16.3 billion) of stocks held by Japanese banks. The government has announced a much larger plan to buy up to 20 trillion yen of such stocks, but this is stalled by political deadlock in Japan's Parliament.

Japan's largest mega- bank Mitsubishi UFJ Financial Group managed to raise the equivalent of US$4.5 billion of new capital last December and No 2 bank Mizuho Financial Group has had to follow suit by raising US$4.7 billion.

Japan's regional banks are thought to be feeling the strain of a damaged economy and rising bad loans, but their capital positions have been eased for the moment by the fact that they are being excused from marking to market equity assets they hold.

The economic and financial crisis has claimed finance company SFCG as a victim, however. Shinsei Bank, one of Japan's principal lenders, has meanwhile issued a statement denying that it has any 'direct exposure' to the failed finance company, as was widely reported.