Asia Times: Japan's misguided stock market bailout plan


	April 19, 2000	atimes.com

Japan

Japan's misguided stock market bailout plan
STRATFOR.COM's
Global Intelligence Update
April 18, 2000

Summary

Japan's premier stock index experienced its fifth-largest drop ever on Monday in response to the Dow Jones plummet on Friday. Japan's government has now proposed direct intervention in the Japanese stock exchange. If executed, the new plan would fritter away billions of dollars and further indebt an already fragile economy.

Analysis

The Nikkei-225, Japan's premier stock index, dropped 6.98 percent on Monday. This, its fifth-largest drop ever, was in response to the Dow Jones plummeting on Friday. To counter the perceived threat of a stock market meltdown, the three parties of Japan's coalition government submitted a proposal that will likely be adopted. The proposal calls on the government to intervene directly in the Japanese stock exchange to prop up share prices. Against all odds, Japan has found a way to make its already piddling economy even worse.

This drop was not insignificant. The total value of Japan's stock market is approximately the same as Japan's GDP - about $4 trillion. It is also one of the last economic institutions that has not been hindered by direct government intervention. The stock market is heralded as one of the few sure sources of capital for an economy managed by a government addicted to borrowing. The governing coalition's new plan envisions purchasing one trillion yen ($92 billion) of stock to offset the recent loss.

Other countries, while not thrilled with their stock market devaluations, are shrugging off the losses as the cost of being linked to an international economy. Also hard-hit were Hong Kong, Mexico and South Korea. Only Japan is reacting with such a large- scale intervention. The effects of the new Japanese plan will be numerous and dire.

First of all, Japan cannot afford such a costly bailout. After a decade of barely perceptible growth and rising debt, the government has little money to spare. Japan's economic stagnation is exacerbated by its expensive cradle-to-grave social welfare policy and an economic structure that values stability and personal connections over ingenuity and merit. Japan needs to address these problems. Spending billions on bailing out a stock market that is suffering a cyclical downswing is not the way to do it.

Second, a $92 billion investment amounts to only 2.3 percent of the market's value, not nearly enough to account for the recent loss. If the U.S stock market plummets further, as expected, Japan's $92 billion investment will be wasted money. Stock markets are by their nature volatile as the past few months in America plainly demonstrate. Dumping an extra $92 billion into the market whenever it falls beneath an arbitrary trigger - especially when the fall is caused by factors in New York - is economically unsound.

Third, Japan is already so low on cash that it has to take out high interest loans to fund its stimulus packages. This new plan calls upon the government to tap into one of its few remaining sources of funds, pension reserves - the Japanese version of Social Security. This would be equivalent to the United States spending retirees' savings to bail out private investors whenever the Dow drops below 10,000.

Fourth, Japan's record of intervention is less than stellar. Often times when the government has intervened in the currency markets to weaken the yen, it strengthened instead. With the yen continuing to strengthen, Japan is likely to engage in another of these pointless interventions soon. Stock markets are even more difficult to predict. US Federal Reserve Board chairman Alan Greenspan solves this problem by having as little to do with the stock market as possible.

The recent proposal also calls upon the government to accelerate the implementation of large-scale public works projects outlined in the 2000 budget. The logic being that early spending will help alleviate the negative short-term effects of the stock market fall. However, accelerating the implementation of the stimulus package, paid for with borrowed funds, will strengthen the possibility that Japan will borrow even more from its crippled banks later in the year.

Incurring more debt will sink Japan - already holding the world record for most-indebted government with $6.15 trillion borrowed - further into the red. Japan currently runs a budget deficit of nearly 40 percent. When Japanese interest rates rise as eventually they must - Japan cannot keep them at zero percent forever, especially with US rates at 6 percent - the cost of servicing these debts will mushroom and crash the Japanese budget.

Despite the unfettered stupidity of this plan, Japan will likely implement it, so powerful is the perception that it must address the most visible aspect of its flagging economy - the stock market. The plan already has the support of the top policy makers of all three parties in Japan's ruling coalition. Japan's uninspiring prime minister, Yoshiro Mori, is not the type to stand in the way of such consensus. Furthermore, Japan has a history of adopting imprudent measures, such as taxing its dilapidated and stressed banking system to create the illusion of economic progress. If implemented as intended, the new plan will squander away $92 billion of Japan's pension fund and further chain down an already hobbled economy. Not a small feat.

(c) 2000, Stratfor, Inc. http://www.stratfor.com/

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