TOKYO — As the dramatic slide in the Japanese stock market continues, an unexpected drop in the value of the yen has left the short-term future of Japan's economy clouded.
Businessmen, bankers and analysts say they are certain of one thing: The era of high yen, soaring stocks and low interest rates that sustained real economic growth at nearly 5% for the last three years has ended.
But opinion remains divided over whether the turmoil on Tokyo's markets represents a bubble bursting--or just some of the air escaping.
After a mild dip Tuesday following the market's second-largest gain ever on Monday, the Nikkei average of 225 stocks had lost 18% of its value since the beginning of the year. Last Thursday, the plunge reached 26% at one point.
At the end of morning trading today, the Nikkei was down 516.38.
The yen, meanwhile, has shed 8.1% of its value this year. But all of its loss has come within the last several weeks, since the Feb. 18 general election.
Bankers and dealers, who originally predicted a year of stability, now are bracing for more bleak days ahead. Up to a 24% drop is estimated in the exchange rate by the end of the year. On Tuesday, the yen closed at 156.96 to the dollar.
Even Japan's top business leaders have been left confounded by the turmoil and contradicting each other as to its significance.
Eiji Suzuki, chairman of the Japan Federation of Employers Assns. (Nikkeiren), on Thursday called the trouble "an exposure of (Japan's) bubble economy" and warned that if the government and the central bank fail to take appropriate measures, "the bubble will burst."
However, Eishiro Saito, chairman of Keidanren (Federation of Economic Organizations), declared there is nothing to worry about. The fundamentals of Japan's economy, he said, remain solid.
Offering a third analysis, Tokyo University business professor Kei Takeuchi said the plunge in yen and stock values clearly signals a change in the Japanese economy--but added that the direction of the change remains unclear at this time.
In the meantime, Japan is completing a 40th consecutive month of growth, its third-longest boom, fueled by domestic demand rather than exports. Except for the effect of a 3% consumption tax implemented last April 1, price increases have been negligible. And both business investment and consumer spending remain firm.
More than a dozen Japanese corporations have dropped plans to issue new stocks since the market began falling in earnest after last month's election, although capital spending plans remain robust.
Still, analysts agree that it is too early to predict any long-term damage from the plunge in stocks and yen, noting that both have gone through wild swings in the past.
In 1970, 1971, 1973 and 1987, for example, stock prices suffered plunges that ranged from 18% to 24%. After reaching a peak of 176 to the dollar in 1978, the yen too fell by nearly 50% at one point, before it started gaining value again and setting new records.
Rising interest rates, however, may take their toll later. From a post-World War II record low of 2.5% last May, the Bank of Japan has now raised the rate at which it loans funds to commercial banks to 5.25%.
Norinobu Takahashi, chief analyst at the Mitsubishi Research Institute, said inflation pressures from the cheaper yen, wage increases and an expanding money supply have grown so strong that the Bank of Japan may be forced to raise its discount rate to as much as 6% if the government fails to adopt a fiscal policy that curtails demand.
Analysts are beginning to worry that the stock plunge may create a tightening of the purse strings--a "reverse assets effect" for both large corporations and wealthy individuals. Higher interest costs also could deal a psychological blow to consumers wanting to purchase color TV sets, luxury automobiles, refrigerators and other high-priced goods, warned Akio Tanii, president of Matsushita Electric Industrial Co.
Plant investment also could be hurt, although some economists believe that a growing labor shortage will force corporations to continue investing in labor-saving machinery, whatever the cost.
Fears that exports may once again take off, however, were muted.
Naruki Kato, securities chief of Sumitomo Life Insurance, predicted in the Asahi newspaper that Japanese investment in the United States and selling of the yen would continue, even though real interest rates in Japan are now higher than in the United States.
Indeed, overseas investment--which has expanded from big business to small enterprises to even individuals buying resort homes--has helped depress the yen's value by creating a strong demand for dollars.
Expectations that the yen will depreciate even more--or at least will not strengthen significantly--have spurred increased purchases of U.S. and European stocks and bonds. This outflow has supported the New York Stock Exchange, according to Masao Susaki, senior counselor of the Bank of Tokyo.
Skyrocketing land prices and stable rents, meanwhile, have reduced yields on land investments to the point that foreign real estate is a better buy and easier to acquire than in Japan, said Toshihiko Fukui, executive director of the Bank of Japan.
Even tourists are contributing to the dollar drain. Last year 9.6 million Japanese traveled abroad, creating a $19.3-billion deficit in Japan's tourist balance of payments. More than 10 million Japanese are expected to make overseas trips this year.