Toshiba, the world's biggest maker of notebook PCs, and Komatsu, Japan's largest maker of construction equipment, may pace an across-the-board fall. "Japan is at the epicentre of a global earthquake," said Scott McGlashan, director and head of Far Eastern investment at Perpetual. "Terrible GDP, major revisions down to corporate earnings and a continuing impasse on bank rescue would drive the market to new lows, even if the rest of the world looked hunky-dory."
The benchmark Nikkei Stock Average fell 0.9 per cent to 13,916.98 last week, only the second time in 12 years it has fallen below 14,000. It will probably trade between 13,500 and 14,500 next week, said Kiyoshi Tsugawa, chairman of Lehman Brothers Japan. The benchmark government bond yield fell 29 basis points to 0.78 percent.
Japan's economy shrank for a record third-straight quarter, contracting 0.8 per cent in April-June from the previous quarter and 3.3 per cent on an annualised basis, as Japan dug its heels into its worst recession in more than 50 years.
"I don't think the government is aware the economy is contracting as violently as it is; it's screaming for domestic restructuring," said Andrew Aiken at Credit Suisse First Boston. "There's a good chance that the market does trade significantly lower on the back of this."
The market may also suffer if companies sell off cross-shareholdings in preparation for the end of the fiscal half-year on 30 September.
If the parliamentary gridlock between the ruling Liberal Democratic Party and the opposition parties on key financial legislation shows no signs of breakthrough, banks will fall further. Yet bonds could be hurt if the LDP and opposition parties reach a compromise.
Wall Street's moves could influence Tokyo as well, especially top exporters and hi-tech issues. "The big unknown from here on is whether or not Wall Street can stop sliding," said Pelham Smithers at ING Baring Securities.
"What can we buy in our country [Japan]?" said Hideo Takemura, a general manager at Partners Asset Management. "The only option to pick is bonds, given global deflation."