Stocks and Yen Turn Volatile

IN a thousand-year-old tradition, the Japanese will be out in force this week to behold cherry blossoms floating to earth. But they will also be watching to see if the bloom has fallen off the Tokyo stock market as well. Japanese stock prices, unlike flower petals, have not found solid ground after losing one-quarter of their value in just three months this year - 9 percent last week - based on the 225-stock Nikkei index (see chart).

Four times in the post-war period, the Tokyo Stock Exchange has fallen more than 30 percent. Each time, recovery took three to four years, according to the New Japan Securities Research Institute.

Ever since the Tokyo market took off in 1986, a chorus of Western economists has warned that Japanese stocks were overvalued. Tokyo prices defied that logic for four years, tripling in value and turning Japan into the biggest capital market in the world. The economy, too, has been on a 40-month roll, driven in part by a halving of official interest rates.

The bubble explodes

After the market hit a low last Thursday, the newspaper Nihon Keizai carried the editorial headline: ``Any bubble will explode some day.'' The widely read and well respected newspaper had been a lone but powerful voice trying to convince Japanese investors that stocks indeed have unrealistic price/earnings (P/E) ratios (see table).

The editorial went on: ``In the past several years, the Japanese stock market consecutively went up because investors bought shares as stock prices went up, which again made investors want to buy.

``Stock prices went too high compared to the reality of [companies' earnings] and the bubble just expanded. But, such a bubble will explode some day. The time has just come.''

Even so, stock prices are still over twice as high as in early 1986. P/E multiples remain well above 40. Any further drop in prices that would bring the Tokyo market down to P/E ratios in the US would be too drastic, triggering strong government action.

The free-fall of the stock market has also helped drive down the value of the yen by almost 10 percent, forcing the Central Bank last Tuesday to raise its official discount rate by a full point to 5 1/4 percent.

That was the fourth rate hike within a year, and the first time that it went above 5 percent in four years.

The action was widely judged as ``too little, too late'' to halt the market decline. Bank officials were criticized for leaking news of the rise.

In another emergency step, the minister of finance, Ryutaro Hashimoto, called in the chiefs of Japan's four big brokerage houses - Nomura Securities Company, Daiwa Securities Company, Nikko Securities Company, and Yamaichi Securities Company - in an effort to guide the stock market back to health. As one incentive, he loosened rules on how much each brokerage firm can trade each day. And on Friday, the market did rebound slightly.

The yen did not, however, topping 155 to the dollar for the first time in three years.

Support for the yen

Mr. Hashimoto then flew to the Los Angeles airport for five hours of trade talks with United States Secretary of Treasure Nicholas Brady, during which he also asked for Washington's help in supporting the yen. Officials fear that a weaker yen will boost Japanese inflation and worsen an already dangerous trade surplus with the US.

But Tokyo analysts expect little boost in the stock market this week because of the apparent lukewarm response by Mr. Brady to intervention in the currency markets on Japan's behalf. Japan wants to invoke the cooperation promised under the 1985 Plaza Agreement of the Group of Seven (G-7) major industrialized nations. That pact led to a doubling of the yen's value, and helped US exports.

``I told Mr. Brady I'm concerned about the yen's present weakness, and his response was one that would not dismiss my concern,'' Hashimoto said, putting the best light on the meeting.

The US may be in no mood to help Japan as the two nations are nearing crucial decisions on major trade issues in coming weeks. The next test for joint currency support will come April 7 when G-7 finance ministers and central bank leaders meet in Paris.

US indifference ``will not make a trump for improving the value of the yen,'' stated Japan's leading business newspaper, Nihon Keizai.