Tokyo Market: Sinking feeling for shares

Japanese stocks may sink this week to depths untested for more than 12 years, as investors worry that the ills crippling its economy may be spreading to the rest of the world.

Institutions such as Bank of Tokyo-Mitsubishi may lead the retreat amid concern that eroding assets will force them to scale back lending. Global exporters including Sony and Honda Motor may follow close behind if Wall Street continues to wobble.

"We're caught in not one but two vicious cycles," said Yosuke Mitsusada at NCG Investment Trust, who expects the Nikkei to fall as low as 12,500 this week. "Domestically the credit crunch keeps getting worse, and globally Japan's financial and economic problems are rippling through other markets."

Bonds should gain as investors seek refuge in government securities, amid concern that banking bills sent to the parliament won't improve financial stability.

The Nikkei 225 index fell 3.6 per cent last week to 13,223.69. It closed on Thursday at 13,197.12, its lowest since January 1986. The benchmark government bond yield fell 10 basis points to 0.715 per cent.

Banks may fall below record lows set last week as investors fear that bad loan write-offs and stock valuation losses will force them to constrict credit. That prospect sent shares in some of the country's largest lenders, including Bank of Tokyo-Mitsubishi and Sumitomo, to their lowest level in more than a decade.

Japan's 19 largest banks will reduce new lending by as much as 5 per cent in the year ending March because capital is being depleted as they step up disposal of non-performing assets. The Nikkei's 12 per cent decline through the half year ended Wednesday may have wiped up to 6 trillion yen (pounds 26bn) off the latent value of their investment portfolios.

Exporters such as Sony and Honda, which rely heavily on US sales, will probably take their cues from investors on Wall Street amid concern that growth in the world's largest economy will keep slowing despite last Tuesday's rate cut.

Companies suspected of carrying large latent losses on their books may well remain conspicuous targets for sellers.

Industries across corporate Japan will probably be affected. Nissan Motor fell for three straight days last week, to its lowest level this decade, after it said that its deteriorating stock portfolio may drag it into the red for the half year which has just ended.