View from Tokyo: Sad song of the stock market

LIKE a solo violinist stepping forward to play as the orchestra quietens in the background, so Nippon Telegraph and Telephone has stepped into the spotlight on the Tokyo stock exchange, capturing the attention of the audience of investors.

But the NTT solo is a sad and plaintive tune, poignantly emphasising the tragic condition in which the rest of the market is languishing.

For while the Nikkei 225 Stock Average has fallen by 64 per cent from its peak of nearly 38,917 in 1989 to yesterday's closing level of 14,820, the NTT share price has plummeted from an all-time high of Y3.18m to yesterday's price of Y478,000: an 84 per cent hit that has left private investors seething and is now single-handedly pulling the general market down even further. The NTT shares have accelerated their downward movements over the past two weeks, and analysts say the telecommunications giant still has not bottomed out. (Flourish of trumpets).

'The NTT story is depressing sentiment,' said Kathy Matsui, an analyst with Barclays de Zoete Wedd in Tokyo. 'But it is still over-valued, and fundamentally it has no prospects for earnings growth.' (Rumble of drums).

The NTT saga began in February 1987, when the government decided to sell to the general public shares in what is the world's second largest telecommunications company after AT&T of the US.

The initial price was set at Y1.19m ( pounds 5,204) a share - so high that many investors only bought one share. But in those days securities firms were saying the only way for the Tokyo market was up; and besides what could be safer than a telecommunications company in which the government still held two-thirds of the shares? Within three months the NTT share price had rocketed to over Y3m.

However, as happened with the rest of the market, reality gradually began to impinge on the stockbrokers' more outrageous fantasies. Investors began asking inconvenient questions about NTT's profitability, and its ludicrously high price- earnings ratio. The share price began to fall.

'Basically, NTT span off its profitable businesses - mobile phones and international calls - and was left with unprofitable local calls,' Ms Matsui said. A local phone call in what is otherwise the world's most expensive city still only costs Y10 - about 4p - and NTT has had little luck so far in getting the government to allow it to increase the price. Today some NTT executives are said to be taking perverse pleasure in the latest fall in the company's share price, thinking that it will give them the necessary ammunition to force the government into allowing them to raise the cost of a local call.

However, the Ministry of Finance is not altogether happy with NTT's declining share price. It still has 5 million NTT shares, half of which it had planned to sell on the market. But as an embarrassed Finance Minister, Tsutomu Hata, told a press conference last week, 'market conditions must be watched a little more' before the government can go ahead with its sell-off plans. In other words the ministry has no intention of selling NTT shares at the same miserable value as debt-ridden private investors holding NTT shares are now being forced to do.

One of the ministry's brainwaves, dating back to 1990, was to allow foreigners to buy NTT shares, in the hope that this would drive the price up. Originally foreigners had been banned from purchasing the stock, supposedly to secure Japan's sovereignty over its telecommunications network. But money came to outweigh principle, so the ministry ate humble pie, and in May this year the Japanese parliament, the Diet, passed an amendment to the original law privatising NTT that allowed foreigners to buy up to 20 per cent of the company's shares, starting on 1 August.

That day has come and gone, and, strangely, few foreigners have been queueing up for the privilege of owning NTT shares. In fact the NTT share price has fallen even further, from 588,000 on the first day that foreigners could have bought the stock, to 478,000 yesterday.

Ms Matsui at BZW said that NTT's depression could deepen even further. Last year NTT's profits fell 15 per cent; this year they are expected to fall a further 25 per cent. 'NTT is still trading on a price-earnings ratio of 54, compared to a market average of 36 to 38,' Ms Matsui said. Say no more.

To return from the NTT solo to the overall symphony of the Tokyo stock market, the same underlying themes hold sway: declining corporate profits, and up to now vain hopes that the government can do anything to reverse the market's decline. The government has floated a few ideas, most of which have gone down like lead balloons.

There is the plan to buy land from troubled banks for public works projects, thereby absorbing some of the banks' exposure to bad property loans while at the same time reinforcing property prices. But property analysts say the government will not be able to buy enough land to either bail out all the bad property loans made in the past five years, or to significantly influence the overall price of property.

Another temporary fix-it scheme was to allow banks - whose share prices have been suffering because of speculation about their overall health - to ignore losses on their stock holdings in their next half-year reports and just include stocks at their original purchasing price. This would make the balance sheets look considerably healthier. 'For the average Joe on the street this could help (in restoring faith in the banking system), but for the investment community it would have the opposite effect,' said Walter Altherr, banking analyst for WI Carr.

Mr Altherr said no accounting sleight of hand can solve the banks' problems: 'There is little the banks can do until they improve their basic profitability.'

The government's biggest piece of artillery, expected to be rolled out ahead of time by the end of this month, is a proposed supplementary budget of Y6,000bn to Y7,000bn. This, say the optimists, will give such a boost to the Japanese economy that the stock exchange's woes will end overnight. 'The problem here is that so much of this supplementary budget has already been leaked to the press that it will contain few surprises,' Jesper Koll, chief economist for SG Warburg, said. 'The government still has this idea that it can pull off this confidence trick. But you are approaching the more philosophical problem of the degree to which the government can influence the economy in the short term, now that much of it has been deregulated.'

(Photograph omitted)