Tokyo Market: Government can't save stocks

JAPANESE stocks are likely to fall this week, led by the banks, on concern that government bills to revive Japan's financial system will prove inadequate even if passed into law. Parliamentary debate begins on six bills aimed at closing insolvent financial institutions and helping banks shed their Y77trn in non-performing loans.

"All eyes are on the `total plan'. Not only is there a strong possibility the opposition will hold it up, but the real worry is that banks won't be able to crawl out from under their bad-loan burden," said Masatoshi Kikuchi, senior strategist at Daiwa Institute of Research.

If the bills are blocked, investors could abandon shaky stocks in favour of bonds, which are expected to rise. "That could prompt a flight-to-quality shift," said Kikuo Shirose, at Tokyo-Mitsubishi Asset Management.

Last week, the yield on the benchmark government bond fell 5.5 basis points to 1.195 per cent. The benchmark Nikkei index fell 3.4 per cent to 15,829.17. It will trade between 15,300 and 16,200 this week, Mr Kikuchi said.

Long-Term Credit Bank of Japan sank to its lowest price ever on Friday on the speculation that its proposed merger with Sumitomo Trust may be in jeopardy. Traders who regard the merger as a prototype of proposed government action for restructuring weak financial institutions would probably trounce banking shares if the alliance is aborted.

Banks may also be dragged down by concern over the potential for another round of currency devaluations across Asia. Vietnam devalued its currency, the dong, on Friday by 7 per cent. The dollar strengthened more than Y1 against the Japanese currency on the news.

Volatility in US markets may provide the third leg of a bearish triangle. "If New York shows signs of floundering again, then it would be hard for Tokyo to hold up," said Celia Farnon, at Nomura Securities. It may undermine support for Japan's top exporters, which have relied on the health of overseas markets to assure profitability in the face of sagging domestic sales and price cutting.

Signs that foreigners are souring on Japanese equities could also pull down shares. Trading is likely to be thin as Japan heads into its Obon holiday. Still, some bright spots remain. Bargain-hungry shoppers may pick up shares of Sony, which fell 4.7 per cent last week on expectation that it will benefit from the weakening yen.