International Survey: Land of the falling sun

THINK BACK to those carefree days of December 1989. With the 1987 stock market crash a distant memory, investors in Japanese equities were looking forward to another year of steady rises. The benchmark Nikkei- 225 had just hit an all-time peak of 38,915, and many analysts were predicting 50,000.

Nine years on the Nikkei has fallen by nearly two thirds. Worse still, the second- and third-line stocks have seen their value collapse by 72 and 83 per cent respectively.

For a country which hadn't experienced recession since before the Korean War, falling share prices have proved far more damaging than in Europe and North America, where the relationship between stock market and "real" economic performance is less opaque.

In Japan, share values have far more significance for the financial system. Most big companies have large trade investments in other quoted companies. Analysts at Daiwa Securities expect losses on share dealings to overwhelm half-year profits of groups such as Shiseido, Nippon Steel, Nissan and Marubeni.

Falling share prices have created a vicious circle in which the impact of past falls on bank balance sheets and corporate profits pushes shares down even further. Hardly surprising, then, that investors are prone to clutch at any straws that are proffered, such as the recent cut in the Bank of Japan's overnight lending rate to a record low of just 0.25 per cent.

But economists such as WestLB's Sanjit Maitra believe that too much downward pressure on interest rates presents other problems. "The Bank of Japan is desperate to avoid another yen crisis and would not do anything that would undermine its support for the currency," he says.

However, many fund managers are pinning their hopes on the recently installed government of prime minister Keizo Obuchi. It has pledged to restore faith in the banking system, stop the slide in credit and stimulate the world's second- biggest economy. In part it has used direct intervention in the stock market to raise the level of the Nikkei to its level of six months ago, some 16,527.

But for investors looking to ride on the government's coat-tails, the omens aren't exactly promising. If the government stopped intervening now, this would be to invite further big falls - scarcely the sort of background needed for successful investment.