Picking up the pieces from the financial earthquake that sent world markets crashing last week, rattled investors are looking to Asia for answers: Is the worst over? Or are there more bad shocks ahead?
The view from Southeast Asia, the epicenter of the crisis, doesn't look promising. But in many ways the more important bellwether could turn out to be Japan.
It is the region's economic linchpin and the world's second-largest economy. As such, its reaction is crucial. If Tokyo can shake off the effects of Southeast Asia's deepening woes, then New York and Frankfurt should be able to do the same.
Neither traders nor government officials are taking the turmoil lightly. On Friday, Japan's finance minister announced that an emergency meeting of Asia-Pacific finance officials, including representatives of the United States, would be held in mid-November to deal with the crisis. Separately, the government pledged $5 billion as part of an International Monetary Fund bailout for troubled Indonesia.
Many stock analysts have taken a negative view and predict the key Nikkei index would fall below 16,000 soon. A fuller picture will emerge in coming weeks as Japanese corporations announce earnings for the first half of their fiscal year.
For the week, the Nikkei closed down 5.2 percent to 16,458.94. That was far below its level this summer when it topped 20,000 and marked a steeper weekly plunge than either Wall Street's 3.7 percent decline or Hong Kong's 4.7 percent fall.
A major factor behind investor concern is that Japan is bound to Southeast Asia, especially Hong Kong, far more tightly than either Europe or the United States is. At the end of last year, for example, 42 percent of all lending to Hong Kong came from Japanese banks. Asia buys 40 percent of the country's exports and accounts for nearly as much of its imports.
But Japan has a far larger and more diversified economic base, analysts point out, and, thus, is better equipped to survive market tremors.
For example, Japan is at a different point in the economic cycle than its Southeast Asian neighbors. A similar speculative bubble that bid up property prices in Hong Kong and convinced Thai teenagers they needed designer clothes burst several years ago in Japan. Japanese banks long ago felt the financial squeeze that now grips Southeast Asia.
Still, Japan's growth outlook may drop from an estimated 2.3 percent this year to 0.8 percent, according to the Paris-based Organization for Economic Cooperation and Development. Most of that decline may be due to a domestic economy that has not yet recovered from the bursting of Japan's economic bubble at the start of the decade. Many of its banks have not written off their troubled loans.
Analysts are not enamored with the performance of Prime Minister Ryutaro Hashimoto, reelected last month as a strong proponent of reform. His attempt to liberalize the financial sector - known as the "Big Bang" - may have to be delayed beyond its scheduled implementation next spring. "This market fall will definitely affect the Big Bang," says Minoru Morita, a well-known political analyst here. Already weakened by the stock market's fall, Japan's insurance companies and financial institutions will have a tougher time competing.
Meanwhile, the public is reeling from continued fresh revelations of high-level links between some of Japan's biggest companies and corporate racketeers. Last week, four officials from Mitsubishi Motors Corporation and another four from a loan company associated with Daiwa Securities were arrested for making payoffs to suspected racketeers.
In fact, the country is so inundated with bad economic news that the stock market's wild ride last week caused little public outcry. "This stock market downturn should be a big issue," Mr. Morita says. But "there are so many other depressing factors."
Analysts don't see the economic woes bringing down the government. "The public ... wants to avoid having this Cabinet reshuffled, knowing that there's no alternative to Hashimoto," says Takashi Mikuriya, a political history professor at Tokyo Metropolitan University.
But the mood remains somber in Tokyo. "It's so depressing here," said one Japanese stock trader after another hectic trading session on Friday. "Japan is part of Asia. And it will take a long time before Asian stocks can recover from this chronic malaise."
* Yoshiko Matsushita in Tokyo contributed to this report.