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16 Mar 2001 Wall St gets a sudden case of Japan jitters But analysts quick to play down impact of Japan banks' downgrade

By Catherine Ong in New York

JAPANESE banks have been in a bad shape for the better part of the last 10 years. But try telling that to Wall Street.

Going by media reports here on Wednesday, it's as if Japan's financial woes had just surfaced. "Trouble in Tokyo," was the headline from the CNBC business news station. It was flashed across TV screens as a parade of talking heads, assembled from the US, Europe and Japan, spent the day dissecting the various problems afflicting the world's second largest economy.

And an article in the Wall Street Journal asked: "Is Japan on the verge of a contagious financial crisis?"

At the New York Stock Exchange, worries about US banks' exposure to Japan after credit rating agency Fitch IBCA put 19 Japanese banks on negative review, sparked off one of the biggest routs of US blue chips.

The Dow Jones Industrials Index plunged to below 10,000 for the first time since last October, closing 317.34 points down, or 3.08 per cent, to 9973.46. Investment analysts and strategists scrambled to assure clients that the end wasn't nigh.

Securities house Putnam Lovell was among the first to rush out a research note addressing the "Tokyo torpedo". "We believe that current fears running rampant through the markets today concerning a Japanese financial meltdown are overblown," the firm's James Mitchell wrote in the note, also sent out to the media.

He pointed out that the problems with Japanese banks "have been well-documented". "We would be surprised if there were any significant losses for the US banks related to their Japanese counterparts."

So why is the decade-long Japanese malaise suddenly haunting Wall Street?

"I don't know why today is the magical day," replied Thomas Goggins, a portfolio manager of the US$3-billion (S$5.3 billion) John Hancock Financial Industries Fund. "It's completely overblown. I think it's a great opportunity to get into brokerage stocks. That's the best way of playing the rebound." Alan Ackerman, market strategist at Fahnestock & Co, said the market was looking for an excuse -- any excuse -- to sell.

"The bear has a good grip on this market right now. I wouldn't be surprised to find it going lower," he said. Mr Ackerman added that he is telling clients to "keep cash, keep cool and keep cautious because we're in a nasty and negative environment".

Tom van Leuven, US strategist at JP Morgan, believes that Wednesday's bloodbath "proved just how jittery investors have become". He noted concerns about Japan and its financial institutions are not new. But these days investors are in no mood to take any chances. "The idea is you see some smoke, you run before you see the flame."

Analysts noted that the market also suffered spillovers from Europe, where share prices fell on concerns that the US economic slowdown could spread across the Atlantic. Bank stocks, leading the falls, were mauled.

Dow components Citigroup, JP Morgan Chase and American Express fell some 7 per cent, and investment bank Goldman Sach about 4 per cent, on concerns of their exposure to Japan.

The tech-heavy Nasdaq market, already 61 per cent down from its peak a year ago, was also not spared the bloodletting.

It was "mind-boggling", said Tanya Azarchs, a managing director at Standard & Poor's in New York.

"I find this an extraordinary idea, that a credit watch on Japanese banks should affect banking stocks in the US. We've all done it (credit watch) all the time, it's never had this kind of effect."

The Fitch credit downgrading, analysts said, was made in the wake of continued declines in Japanese share prices and a recent report showing a 0.3 per cent rise in corporate bankruptcies. The Nikkei 225 slumped to a 16-year low of 11,819.7 on Tuesday.

It was feared that the stock price erosions could further impair the balance sheets of Japanese banks and forced some into bankruptcy in the absence of a government bailout.

From April, Japanese banks are required to mark their securities holdings to market values, an exercise they have avoided all these years in the hope that the government's pump-priming moves would shore up share prices and make the write-downs unnecessary.

Putnam's Mr Mitchell estimated that Bank of America has the largest exposure of about US$9.1 billion, or about 1.36 per cent of its total assets to Japan, mostly in cross-border claims on derivatives deals and held-to-maturity securities.

Citigroup which recently bought over Associates, a US consumer finance group with a large presence in Japan, risks US$7 billion, or less than 0.78 per cent of total assets, before the Associates' investment.

Another money centre bank, JP Morgan Chase, may run up another US$10.8 billion, or 1.5 per cent of total assets.

All in, after Wednesday's meltdown on Wall Street, almost US$5 trillion in market values, an amount nearly half of America's GDP, has been wiped out since the stock market peaked last March.

The wealth effect on many Americans is real and immediate, analysts said, owing to the fact that about half of the population owns stocks directly or indirectly through mutual funds.

In a report yesterday, Morgan Stanley Dean Witter strategist Steven Galbraith warned that the link between the real economy and the stock market is closer than ever before.

While there was no correlation historically between retail sales and the Nasdaq, the correlation since 1996 was more than 70 per cent, against less than 3 per cent from 1972 to 1996.

"This suggests that as the Nasdaq goes, so may go the consumer," he said.

Analysts believe that all these will put pressure on the Federal Reserve Open Market Committee to cut interest rates by 75 basis points instead of the widely expected 50 basis points, when it meets next Tuesday

http://business-times.asia1.com.sg/5/news/nfrnt01.html

-- Martin Thompson (mthom1927@aol.com), March 16, 2001