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Wall St. Unfazed by Tokyo Tumbles

January 22, 1992|TOM PETRUNO

The Japanese stock market is coming unraveled again, threatening to add insult to the injury Japanese share owners have already endured in a severe 2-year-old bear market.

The latest Tokyo Tumble is also recalling the dire warnings issued in 1990--and periodically since then--that the financial mess in Japan can only be bad news for U.S. stock and bond markets as well.

The theory two years ago, when the Tokyo Stock Exchange's Nikkei index (their Dow Jones average) began its steep descent from a peak of 38,916 on Dec. 29, 1989, was that Japanese investors would do whatever it took to protect the "integrity" of the Japanese market.

If that meant selling their huge U.S. stock, bond and real estate investments en masse --to bring that cash back home for use in shoring up Japanese stocks--well, that's what we'd have to expect from the ethnocentric, protectionist Japanese. And the United States, allegedly dependent on Japanese capital, would have to bear the pain.

So here we are, two years later, and the Nikkei is down a stunning 46% from its 1989 peak, to 20,858.30 at Tuesday's close. Yet U.S. stocks are hovering near all-time highs, and U.S. interest rates have fallen sharply. If the Japanese were intent on blindly liquidating their American investments to save their own corporate skins, they didn't do a very good job of it.

In fact, the feared exodus of Japanese money from U.S. stocks and bonds never came to pass. Statistics from the Securities Industry Assn. in New York, which tracks the flow of Japanese money into and out of American stocks and bonds, tell the story:

* Japanese investors did indeed pull back from U.S. stocks and bonds in 1990 after four years of being heavy buyers. They sold a net $2.9 billion of stocks and a net $14.9 billion of Treasury bonds in 1990. Net-sale figures show the amount by which sales exceeded purchases.

* But by the first half of 1991, the Japanese had again become net buyers of U.S. stocks, to the tune of $1.3 billion in that period. And their net sales of Treasury securities had fallen to $4.1 billion, a liquidation rate greatly slowed from the 1990 pace.

Even the 1990 level of net Treasury bond sales by the Japanese looks small, considering the hundreds of billions of dollars in T-bonds in their possession.

The lesson here is not that the Japanese were somehow watching out for America's best interests. Rather, the ability of U.S. financial markets to remain on track while Japan's markets have imploded says a lot about the power of capitalism's natural corrective process and about the major structural changes being wrought by that process in both societies.

In Japan's case, the fuel for the 1980s stock bull market was a mixture of low interest rates, wild real estate speculation that inflated corporate asset values, and an investment- and export-oriented mind-set. Building on that formula, the Japanese came to believe that their companies' stocks were worth prices of 60 times or more annual earnings per share, even while most stocks in the rest of the world sold for just 10 to 20 times earnings.

Since 1989, Japanese interest rates have doubled, the real estate bubble has burst, and the rest of the world has begun beating on Japan's door, demanding an end to overly protective trade policies that have kept foreign competitors from challenging Japanese companies on their own soil.

In essence, the invisible forces of capitalism are slowly correcting the excesses in the Japanese system, restoring balance. And rather than dump their U.S. investments with abandon to bring money home, Japanese investors have soberly judged that home no longer is worth the old prices. So they have let Japanese stock prices plunge.

Christian Wignall, portfolio manager at the G. T. Global mutual fund group in San Francisco, says simply that "Japanese stocks have fallen because they had very low intrinsic value"--and the Japanese finally came to admit that to themselves.

More remarkable is that the plunge has occurred despite the best efforts of Japan's government, its banks and corporations to keep doing business the old way, trying to orchestrate economic growth and guarantee stock market stability. Capitalism triumphs again: The Japanese are learning that free markets must truly be left free.

Meanwhile, in America, equally powerful corrective forces have been at work in the economy and the markets. Americans are consuming a lot less and saving a lot more, the reverse of the '80s. That has beget lower interest rates and encouraged long-term investment in stocks (as opposed to the buyout/breakup mania of the '80s).

Even our real estate debacle looks better compared to Japan's bust, says Jack Rodman, director at accounting firm Kenneth Leventhal & Co., which tracks Japanese real estate trends.

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