Tokyo's new year sell-off gathers pace

The new year sell-off in Tokyo accelerated yesterday as Japan's benchmark Nikkei 225 index fell more than 600 points, its third sharp fall in a row and the heaviest one-day decline since April 1995. In the four trading sessions so far this year, the Nikkei has slumped almost 1,300 points to its lowest level for 14 months as investors have panicked, fearing that bad debts and low growth will continue to hobble Japan's financial institutions and economy.

The collapse in Japanese shares coincided with a visit to the country by the Chancellor of the Exchequer, Kenneth Clarke, who contributed to the debate on the future of Japan's markets by calling for more rapid deregulation of the heavily controlled financial system. He also advised Japan's Finance Minister, Hiroshi Mitsuzuka, to use privatisation to reduce the government deficit.The Japanese government, which faces a 7.4 per cent annual fiscal deficit, is aiming to reduce the deficit to 3 per cent or less by 2005.

Mr Clarke is understood to have said the government should move more quickly than a projected five-year deregulation programme. Mr Mitsuzuka responded that the government intends to implement deregulation sooner if possible, and reminded him that the non-life insurance market will be completely deregulated by July 1998.

Japan's stock market has been the biggest loser among the world's bourses so far this year with all its main indexes having lost more than 5 per cent of their value. At Thursday's close of 18,073.87, the Nikkei remains firmly locked in the depressed trading range it has been stuck in since 1992 when the market finally bottomed out after a 50 per cent plunge from its 1990 high of almost 40,000.

For almost five years the Nikkei has threatened to break out of the 15,000 to 20,000 trading range but recurrent worries that the government is unable to stop the decline in land prices or clean up the bad debt hangover from the late 1980s bubble economy have so far kept equities in check.

Yesterday Mr Mitsuzuka said the government had no plans to boost the Tokyo stock market, causing Japanese investors to fret about a repeat of 1995's fall in the Nikkei to less than 15,000. Asahi Mutual Life Insurance's Koichi Kurata said: "The market is going to continue to decline unless the government does something. The biggest problem continues to be bad debt. Investors were pretending the problem had gone away."

Japan's tumbling stock market was viewed phlegmatically by European markets yesterday, with the plummeting Nikkei index providing little more than a long-distance spectator sport for traders here.

Although Japan is the world's second-biggest economy, few European companies have a meaningful exposure there. Fears of slowing growth have little bearing on European businesses.