Waning inflation fears spur Japanese stocks


TOKYO -- The Tokyo Stock Exchange is surging powerfully in response to mounting signs of a slowdown that would permit the government to relax its anti-inflation policies.

After two weeks of repeated leaps, the 225-stock Nikkei index surged again Monday, gaining 886.27 points, or about 3.5 percent, to 26,297.84, its highest close since Aug. 21, 19 days after Iraq occupied Kuwait.

Like many world markets, the TSE mostly marked time for the rest of the week, waiting for definitive news on the Persian Gulf war. Yesterday's news that Iraq had accepted a Soviet peace proposal sent the Nikkei up more than 200 points in early trading, but word of the U.S. response turned the market around. The index closed down 121.56 points, ending the week at 25,902.81.

Most of the Tokyo market's February surge has been powered not by war stories but by signs that the world's second-biggest economy might at last be slowing enough to permit easing of the hard-line tight-money program the Bank of Japan has pursued for nearly two years. The hard line led to the collapse of the Tokyo market last year even though the economy was soaring.

"Japan was slower to take off after the war started, and the difference is interest rates," Claude Romaine, an investment adviser, said recently.

"In the United States, the start of the war was accompanied by two rapid-fire reductions in interest rates, and Wall Street never looked back," he explained.

"In Japan, the market also surged for a couple of days after the war started, but then it sat agonizingly still for two weeks until the news here began to suggest that interest rates might budge."

Even then, he added, European and U.S. institutions and investors, looking for opportunities that had not appeared with the same rush they had on Wall Street, led the initial rounds of buying. Then some Japanese began to join in.

The central figure influencing Japanese interest rates is Yasushi Mieno, the governor of the Bank of Japan, who deliberately burst the TSE's 1989 bubble with a relentless tightening of interest rates.

In addition to bringing stock and real estate prices down from the speculative stratosphere, Mr. Mieno has been determined to cool a severely overheated economy that is still plagued by a deepening labor shortage and some residual inflationary tendencies even after two years of tight money.

For the past two weeks, Mr. Mieno has gone out of his way to issue almost daily warnings that a reduction in interest rates is not imminent. Members of his staff have suggested publicly that rates would be cut in April or May at the soonest.

But after 12 months of nothing but plunging share prices, which stripped the Nikkei of nearly half its value at the low point, investors have begun to betray an eagerness to breathe life into the bull market and seem little inclined to listen to cautions, even from the central banker whose policies most influenced the TSE's 1990 implosion.

Instead, they have looked at signs of a slowing economy, guessed that falling postwar oil prices will ease inflationary pressures and concluded that Mr. Mieno might have to reduce rates sooner than he is saying.

For two weeks, the signs of slowdown have been abundant, though no one suggests that the Japanese economy is in danger of falling into recession.

The most telling figure was the January growth rates for the money supply, which were dramatically lower in all categories, compared with December.

The Bank of Japan's broadest measure, consisting of M2 plus certificates of deposit, was up 7.3 percent from a year earlier, compared with an 8.5 percent growth rate in December and with more than 13 percent last April and May. The narrower measure, M1, consisting of cash and demand deposits, was up 4.7 percent, compared with 6.2 percent in December.

The main weapon in curbing growth in the money supply has been interest rates. Mr. Mieno has direct control over the rate the Bank of Japan charges on loans to its member banks. He has raised this discount rate five times -- to 6 percent -- since early 1989. In the process, Mr. Mieno has ordered major banks to limit the growth of their outstanding loans and "advised" them to slow the growth of real estate lending even more.

A key effect of high interest rates has been to make yen-denominated investments more attractive, thereby strengthening the yen against the dollar, which has dropped from 150 yen last summer to 130.85 Friday. That in turn has slowed Japan's exports, to the point that automakers Honda and Toyota have announced cuts in production for the U.S. market.

At the same time, high interest rates have begun, after two years, to cut deeply into the country's three-year big-company investment boom. Private-company machinery orders were 27.9 percent lower in December than in November.

The tightening also shows in bankruptcies. The total debt involved in new January filings was 642 billion yen, the most for any month since August 1985.

Analysts in Japan treat these effects as the intended fallout of a tight-money policy that is centered on Mr. Mieno's determination to keep inflation from getting out of hand in a still-vigorous economy.

Japan's economic growth for the 12 months that end in March is expected to be 5.5 percent to 6 percent, and most estimates for the next year are about 3.5 percent.

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