International markets: Tokyo - Stocks face a triple whammy

Japanese stocks are likely to fall this week on pessimism over the struggling economy, the government's economic stimulus package, and the ailing financial system. Concern that financial institutions may have to sell bonds to make up for losses in equities will depress the bond market. "Concern over a 'triple-weakening' is strong," said Soichi Okuda, senior economist at Nippon Credit Bank.

The Nikkei index fell 4.8 per cent last week, dropping below the 15,000 level on Friday for the first time since July 1995. The Nikkei has fallen 22 per cent in the year to date. Even after the close, Nikkei 225 index futures traded in Singapore continued to fall, puncturing the 15,000 line to close at 14,940. The yield on the benchmark No 182 government bond rose 1.5 basis points to 1.635 per cent.

"The market is likely to trade in the 14,500 to 15,000 range," said Christophe Aurand, fund manager at Taiyo Life Gamma Asset Management. "Public and corporate pension funds may support the benchmark, but won't alleviate concerns about the market's health," he added.

The ruling Liberal Democratic Party released its second economic stimulus package in a month. The package lacked measures, such as income tax cuts or public works spending, that could quickly spur economic growth. The government will present a similar package next Tuesday, and investors are betting it will come short of the mark.

"It's like giving cold medicine to a cancer patient and telling him to get better," said Takashi Otsubo, vice president at Fuji Investment Management. "The government missed the chance to heal the economy before it was in such dreadful shape."

Banks are likely to continue to fall as investors shed financial issues from their portfolios amid concern about rating downgrades, bad loans and losses on equity holdings. The Topix banking index fell 4.16 per cent in the past five days.

IBCA, a European credit rating service, Thursday downgraded its ratings for Fuji Bank, Industrial Bank of Japan and Sakura Bank. It also placed Dai-Ichi Kangyo Bank, Sanwa Bank and Sumitomo Bank on watch for possible downgrades.

The downgrades raise the cost of borrowing for Japanese banks. The "Japan premium" - the charge Japanese banks incur when they borrow overseas - has soared amid Japan's fiscal crisis, doubling in four days.

Copyright: IOS & Bloomberg