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Wednesday, Sept. 17, 2008

Tokyo stocks plunge 5% to three-year low

Staff writer

The Tokyo Stock Exchange's key Nikkei average plunged 5 percent Tuesday to its lowest level in more than three years as the failure of the U.S. securities firm Lehman Brothers Holdings Inc. spooked investors.

The benchmark gauge fell 605.04 points, or 4.95 percent, from Friday to 11,609.72, its lowest close since July 8, 2005, when it ended at 11,565.99.

The Topix, which covers all first-section issues, was down 59.63 points, or 5.07 percent, to finish at 1,117.57.

"Concerns over finance and economic recession are doubly punishing (the market), lowering the stock prices of relevant sectors," said Hisatsune Kobayashi, senior market analyst at Nikko Cordial Securities Inc.

Reacting to heightened doubts about management at U.S. banks and insurance companies, insurance and financials shares here were sold off, Kobayashi said.

Investors, fearful that funding problems would delay the domestic economic recovery, also shed shares of wholesalers and shipping companies, Kobayashi said.

But because stock prices have already hit bottom, prices are likely to remain at about the same level for the rest of the year, he said.

"Unless the economies of (Japan) and emerging and advanced countries recover quickly, and corporate businesses get back on track, it will be hard to envision a clear upward trend," Kobayashi said.

Economists, who are keeping a close watch on the effects of the Lehman Brothers bankruptcy on the global and Japanese economies, expect the U.S. Federal Open Market Committee to lower interest rates this week to avoid further market turmoil.

"In the short term, global financial markets centering on the United States will be disrupted and stock prices will drop dramatically," said Hideki Hayashi, chief economist at Shinko Securities Co.

Lehman's bankruptcy "obviously is a trigger of that," Hayashi said.

Risk-averse investors will largely stay away from stocks, which could negatively affect the global economy, Hayashi pointed out.

Already trending downward economically, the turmoil might deepen Japan's recession, he said.

Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co., suggests the U.S. Federal Reserve will likely lower interest rates this week to help strengthen the economy.

"By (lowering interest rates), the negative effect on the real economy would be erased," Nagai said. "I do not see this (Lehman bankruptcy) as pushing the (U.S.) economy into another depression."

Meanwhile, there is little Japan can do, said Yasunari Ueno, chief market economist at Mizuho Securities Co. "Problems are happening outside" the country.

Shinko Securities' Hayashi agreed, adding that Japan won't be immune to the market turmoil. Lehman "has a large corporation in Japan, directly affecting the Japanese financial system," he said.

If the FOMC does not lower interest rates, U.S. stock prices will drop further, endangering some Japanese financial institutions and forcing the Bank of Japan to quickly increase fund supplies to the market, Hayashi suggested.

Also, if U.S. stock prices and the dollar go lower, governments might jointly intervene by buying the greenback and selling yen, Hayashi said.

Despite appearances, however, not all is doom and gloom, according to Hayashi.

Market fears could further push down already declining crude oil prices, which had been boosted by speculative investment, producing some positive effects on the world economy, he suggested.

Information from Kyodo added

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The Japan Times

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