Brokers and Housewives: Tokyo Skid Spares None

A wide variety of Japanese companies could be hurt by the recent plunge in stock prices on the Tokyo exchange, financial experts said Monday.

Banks, insurance companies and securities firms, which all hold massive stock portfolios, may have to take losses on their investments when they close their books March 31, the end of the Japanese fiscal year. And these short-term hits could be the mildest effect of the past week’s 11% drop in the Nikkei index of 225 stocks.

Economists and brokerage experts are more concerned that Japanese housewives, who have provided a steady base for the market’s remarkable performance over the past several years, could become disillusioned and abandon stocks, much as individual American investors fled the market after the October, 1987, crash.

Worse still, economists believe that the recent volatility in Tokyo is more a symptom than a disease. And the disease--which is both economic and political--is serious.

“There are economic, political and bureaucratic reasons for the market falling on hard times,” said Robert Brusca, chief economist for Nikko Securities International in New York.

The Japanese are widely disillusioned with their political system, which has been battered by corruption and bribery. And although the country’s recent elections were expected to quell some of these concerns, some new appointees have been tainted, Brusca said.

Meanwhile, the two bureaucracies that previously worked in concert to boost the stock market and the economy now seem to be at odds. The Bank of Japan wants to raise interest rates to quiet inflation, but the Ministry of Finance believes that interest rate hikes would further damage the stock market.

But the most serious concerns are economic. In previous years, Japan benefited from what was termed the “triple merits”--low interest rates, a strong yen and low oil and commodity prices.

“Right now, that process is working in reverse--triple demerits, so to speak,” said John Hickling, portfolio manager of Fidelity International Growth and Income Fund. “Interest rates and oil prices have gone up a lot, and the yen has been very weak against the dollar.”

High interest rates tend to depress corporate earnings, which in turn depress stock prices. And increasing oil and commodity prices could boost inflation. The strong yen, meanwhile, has given the Japanese stunning purchasing power, which is bound to wane along with the currency.

Those factors will make it difficult for the Japanese stock market to quickly recover from its recent losses, market experts said. The Nikkei average, a primary indicator of overall stock prices, has fallen 14.4% from its December highs and dropped nearly 11% in just the past week.

The impact of such a decline could be substantial on a wide variety of companies that hold and trade securities.

Brokerage houses, which generate well over 50% of their revenues through retail trading, could be hurt the most, particularly if small investors are scared away. These investors are the bread and butter of the Big Four investment houses, despite the fact that big institutions such as banks, insurance companies and manufacturing concerns control about 60% of the shares listed on the Tokyo Stock Exchange.

Moreover, a souring market makes it difficult to bring companies public, another major source of revenue for the securities firms.

Meanwhile, a diverse group of manufacturers have used a system called zaitech , in which they will actively buy and sell securities to boost corporate profits with capital gains. These companies could also get pinched by the drop in stock prices.

Then too big financial institutions have substantial securities holdings that could be hurt by the drop in the Nikkei average. But these declines are not expected to result in losses on the banks’ earnings statements.

Japanese banks, for example, often hold large stakes in companies that do business with them. In most cases, the banks account for these holdings at their purchase prices, leaving them with huge unrealized profits.

However, some banks have recently attempted to offset losses on problem foreign loans. Consequently, they’ve sold these undervalued holdings, recorded the gains on their books and repurchased the stock.

Those moves could prove costly if the stock market continues to decline and the banks find themselves forced to recognize the declining value of the stocks on their balance sheets.

But since most Japanese banks have pursued this strategy with only a small portion of their stock portfolios, the market decline is not expected to cause immediate losses.

Indeed, experts compared the effect of the overall market drop to the impact of a one-year drop in Southern California real estate prices on the net worth of a person who bought a home 30 years ago.

“These are securities they have owned for years and years. They have huge, hidden reserves,” said Gregory A. Root, president of Thomson BankWatch, a widely followed bank rating agency in New York.

Last December, the Nihon Keizai Shimbun, or Japan Economic Journal, published figures that show major Japanese banks have about $300 billion in unrealized stock profits. For most Japanese banks, those unrealized gains alone far exceed the net worth of the largest U.S. banks. And that doesn’t include billions more in unrealized gains in real estate that those banks own.

At the time, Dai-Ichi Kangyo, the world’s largest bank, had the equivalent of $35 billion in unrealized stock gains. Sumitomo Bank had the equivalent of about $28 billion in unrealized gains.