"The bill for a wild explosion in asset values during the 1980s is coming home with a vengeance for Japan"
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There are no sure things in stock markets, yet for a long while it looked as if the Japanese had discovered the key to a unique phenomenon - an equity market that just kept growing. For 25 years from the mid- 1960s, the Tokyo stock market produced a quite miraculous performance of consistent upward growth.

Alone among the major stock markets, Tokyo was able to shrug off the recessions of the mid-1970s and early 1980s. It alone avoid the fallout from the 1987 market crash. When the Nikkei index peaked at 35,000 in 1989, Tokyo was the largest stock market in the world for a few months in market capitalisation.

It was, of course, too good to be true. That such a furious pace could not be sustained indefinitely was never seriously in doubt. Many old stock market hands started predicting trouble two or three years before the market peaked. But only a handful dared to suggest the fall could be quite as relentless as that which has in fact occurred over the past six years.

In the event, the Tokyo market has fallen by about 60 per cent from its peak in 1989. This year alone, it is down by 15 per cent. The decline has been nothing as precipitous as 1929, or the last great London bear market in 1974-75. The Hong Kong market regularly yo-yos much more spectacularly.

But the relatively undramatic rate of decline cannot disguise the absolute scale of what is, in nominal terms at least, by far the biggest stock market crash of all time. The fall to the current index level, between 14,000 and 15,000, has caused the capitalisation of the market to decline by the equivalent of pounds 14,000 billion. This is such a fantastic sum that it barely has meaning. One way of measuring it is to say that since 1989, the Tokyo market has fallen in value by three times the current value of the entire London stock market.

The decline is a symptom and a cause of what is now a serious economic and financial crisis in Japan. By Western standards, performance of the Japanese economy still looks remarkable - huge trade surplus, unemployment of just over 3 per cent and zero inflation. But these figures are deceptive. What is clear is not just that the Japanese economy is slowing down, but that it is in the grip of serious debt deflation, similar in kind if not yet in scale to deflation that crippled the US and Britain in the early 1930s. The bill for a wild explosion in property and other asset values during the expansionary years of the 1980s, fuelled by over-indulgent bank lending, is coming home with a vengeance.

For the first time, the Japanese Ministry of Finance has been forced to admit that the banking sector in Japan has huge bad debts. Even the mighty Japanese industrial sector is hurting as consumers cut back and the yen squeezes profits.

Where will it all end? Many big life insurance companies are now having to sell equity holdings to meet obligations. Foreigners, many of whom got burned last year when they tried to buy back in at around the 21,000 level, are scared to repeat the experience. Domestic investors are in no mood to buy. In that sense, there are no buyers to stop the slide.

The remarkable fact about the Nikkei index at its current level is that, despite the huge fall of the last six years, the p/e ratio (now down to about 50) and the market's dividend yield (up to 1 per cent) still look demanding compared with their UK and US counterparts. The Footsie index has a yield at the moment of just over 4 per cent and a p/e of 14. According to analyst Andrew Smithers, the fair value of the market may be no higher than 11,000.

The big question is not whether but when the Government will bite the bullet and bail out the worst-hit banks. Most observers expect action within two months but the Government is a weak coalition, so action is not inevitable.

Nevertheless, as always where markets are concerned, the darkest hour is always before the dawn. A number of traditionally contrarian investment houses, such as Foreign & Colonial, have nailed their colours publicly to the view that the Tokyo market is due for a sharp recovery this year. If so, this week's slight firming in the Tokyo market may be seen as the first signs of recovery that must come one day, and quite probably sooner than we think.

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