View from City Road: Promised stimulus is giving Japan the jitters

The last thing the jitters in the Japanese market represent is a deep-seated commitment to the process of political reform, which was slowed by Friday's vote in the upper house of parliament.

What the markets are really concerned about is the timing and size of the promised new economic stimulus package and the effect the political impasse will have on it.

The Japanese equity market has been firm in the face of economic adversity, helped by foreigners who believe the market cheap for long-term investors. But shares have also been buoyed by expectations, based on leaks, that the package will be a big one.

The two doses of budget stimulus last year are still feeding through. So the important point about the new proposal - which would not benefit pay packets until June - is that it would continue the steady drip-feed the markets believe the Japanese economy needs.

If these expectations - already discounted - are removed, some of the recent confidence underpinning the market disappears.

In that context it is hard to see the drop in Tokyo shares yesterday as the start of a big sell-off, since it is still quite possible that the political impasse will be resolved before the summit between Mr Hosokawa, the Japanese Prime Minister, and President Bill Clinton on 11 February.

If there is a general election, however, the wait for the package will be longer. That would be a testing period for the nerves of foreign investors. The Bank of Japan is unlikely to sit idly by. It may let market interest rates fall if equities get into serious trouble. But there is an outside risk of a political crisis that puts off the package indefinitely, although that does not seem likely on present evidence.