Exporters and banks may lead the retreat as investors, worried that Japan's own financial crisis is worsening, face the prospect of deepening economic chaos in Russia and further declines worldwide.
That combination of external and internal pressures routed Japanese stocks last week. The Nikkei 225 index plunged 1,382.57 points, or 9 per cent, to a 12-year low of 13,915.63.
"We can't see the bottom," said Koji Tada, a general manager at Towa Securities' equities department. "If the US and European markets really start to plunge, there could be no stopping this thing."
Exporters such as Sony and Bridgestone, which rely heavily on a healthy US market, may be sold if Wall Street continues its losing ways. Banks, including Bank of Tokyo-Mitsubishi, the world's largest lender, may be dealt a double blow. While regional economic turmoil increases the risks of defaults by Asian borrowers, bickering between government and opposition parties threatens to stall legislation to stabilise Japan's debt-burdened financial industry.
Market participants hope the US and Germany will lower interest rates. Those expectations limited losses by exporters such as Honda on Friday.
Japanese bonds surged last week. The Japanese government bond, maturing in September 2005, rose Y163 per Y50,000 in face value, pushing the yield down to 1.070 per cent. "The most important thing for investors is finding a safe place to put their funds," said Naomi Hasegawa, a senior economist at Tokyo-Mistubishi Securities.
"There's nowhere else for investors to put their money except in bonds," said Sadao Suzuki, an asset allocation manager at Asahi Mutual Life Insurance.
Bonds may get additional support from speculation that the Bank of Japan might use money market operations to supply ample funds to banks and other short-term borrowers, pushing down short-term interest rates.
Some economists fear that if instability in world financial markets intensifies further, even bonds may lose their appeal.
"There may be a shift from 'flight to quality' to 'flight to cash'," said Tokyo-Mistubishi's Mr Hasegawa.Reuse content