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Excesses Fuel Japan's Stock Market Surge


In case you haven't noticed, the most awesomely valued companies in the world are now listed on the Tokyo Stock Exchange. Nippon Telephone & Telegraph, Japan's national telephone monopoly, for example, is now worth around $330 billion, or roughly three times the value of IBM, America's most highly valued company, and 13 times the market value of American Telephone & Telegraph. One share of NTT costs over $21,000.

But it's not an isolated case. The stock of the computer and communications firm, NEC, sells at more than 100 times earnings while the average stock on the U.S. markets sells at 19 times earnings. The total market value of Nomura Securities, Japan's largest brokerage firm, is around $75 billion, while that of Merrill Lynch is roughly $7 billion.

What's going on? Have the world's investors made a final reckoning of international competitiveness and declared the companies of Japan the hands-down winners? Are the Japanese companies worth those prices by any real measure of profits or asset values, or even the promise of future business?

Not at all. What is certainly happening in the Japanese market is a case of too much money chasing too few stocks. In part, it's a result of the rise of the Japanese yen, the fall of the American dollar and the low interest rates being paid by Japanese government bonds--currently less than 4%.

Unhealthy Symptoms

The insurance companies and other institutions that invest the household savings of the Japanese people have been pouring money into common stocks rather than accepting the low interest on bonds or risking currency devaluation in U.S. securities. And such buying has touched off a boom in a market that has fewer listed companies and fewer shares outstanding than U.S. markets.

But there is more to it than that, not all of it healthy. Japanese industrial companies themselves are using their surplus capital to buy shares of other companies. No, Japanese business is not being hit with a wave of takeovers. But companies in Japan are playing the stock market because they are allowed to report gains in securities trading as increases in their operating profit. Thus, many Japanese managers are doing what U.S. managers are criticized for: dressing up the earnings.

The true picture of Japanese business today is one of companies struggling against the rising value of the yen to do business in world markets. The currency swing is beginning to bite, and profits of most of the leading companies--Hitachi, Sony, Matsushita, NEC, Canon and such--are down in the past year, even with the help of gains from securities trading. Yet the stock prices of all keep going up.

'Greater Fool' Theory

And this situation is causing talk that the stock market in Japan has become a speculative bubble. The cover of the latest Forbes magazine pictures Japan's Rising Sun symbol as an inflating balloon, and the accompanying article compares the Tokyo market today to Wall Street in the late 1920s, replete with stock rigging and manipulated prices.

Forbes is not alone in that judgment. One U.S. investment banker who knows Japan well says the Tokyo market is operating on the "greater fool" theory--meaning you buy a stock today in the belief that a greater fool will pay you a higher price for it tomorrow. And even stockbrokers who are still investing in Tokyo, such as Robin Norton of S. G. Warburg & Co., concede that the situation has become "tricky."

For example, fewer than 2 million shares of Nippon Telephone were put out for trading in the company's initial sale to the public in February; the company has only 15.6 million shares outstanding, compared to more than 1 billion shares of AT&T, America's most widely held stock. The result was a buying panic as practically every Japanese investor, plus any company doing business with the country's communications giant, rushed to buy some stock.

OK, point well made. Tokyo is overvalued, and Americans, who can buy Japanese shares in the form of American Depositary Receipts--vouchers held by a U.S. bank through which holders can receive dividends and capital gains on foreign stocks--should steer clear.

But what happens now? Will there be a collapse of the Tokyo market, similar to Wall Street in 1929?

Government May Intervene

A crash can't be ruled out, given the market's dizzy heights. And instability is already evident--stocks fell 7.5% on the Nikkei 225-stock index (the Japanese equivalent of the Standard & Poor's 500) two weeks ago but have bounced back. Still, a collapse is less likely than such instability would indicate because the Japanese government will almost certainly use its considerable economic power to prevent one.

Not that the government, like some bureaucratic Samson, can hold up stock prices. But it could, for example, allow the companies to write up the value of their real estate assets, thereby making the stock prices seem more reasonable and the nest eggs of Japanese savers less endangered. Basically, though, the giddy stock market is a symptom of the deeper imbalance in Japan's economy--its dependence on exporting without importing. Perhaps if the government succeeds in curing the illness, the symptom will subside on its own.

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