View from City Road: The Tokyo market runs with the bears

The latest crash in Japanese share prices may seem like a distant if unhappy event. But it is a reminder of the deflationary international environment that confronts the struggling British economic recovery.

The Tokyo slump was triggered by concern about the health of the Japanese banking sector, faced with the gathering gloom over prospects for domestic recovery and asset prices.

There is every chance that the slide will continue for a while yet. There are few signs of reviving domestic demand, and many doubt whether the government is willing or able to mount the sort of support operation launched in 1992.

The most optimistic Tokyo analysts look for recovery only in the second quarter of 1994. Although the government has announced three large fiscal stimulus packages over the past 15 months, much of the impact has yet to feed through or is simply illusory. The impetus from public sector construction spending has been particularly disappointing.

The debate has therefore moved on to taxes. A large cut in income taxes, of between 5 and 7 trillion yen (pounds 64bn), is on the cards eventually. Whether this will be enough to stop confidence from falling further is questionable. Business has been hit by the strong yen and, unlike previous periods of currency strength, it has been unable to fall back on buoyant domestic demand to compensate for losses in export markets.

Companies are chopping back overtime. Bonus payments, a permanent feature of the Japanese wage system, also face the axe. Worried consumers are therefore likely to save a proportion of any tax windfall, which may in any case lie some way off. The seven-party governing coalition must first resolve the question of political reform - and then override bureaucratic resistance to tax cuts and plans for an offsetting consumption tax.

The Tokyo market may run with the bears for some time yet.