Land of the falling stocks

The Nasdaq may have plunged 6 percent on Monday to a more-than-two-year low, but the turmoil in Asia is worse. The Nikkei average shed another 2 percent Tuesday to finish at 11,819.70 - its lowest close since January 28, 1985.

A cloud of pessimism spread over Tokyo as fund managers expressed concern about the future movement of the Nasdaq, which many of them see as the most important stabilizing force for the depressed Japanese market.

"The Nasdaq effect has been quite huge . . . and there's a strong concern among us about a possible global recession," says Kazuhide Shibuya, manager at Mitsubishi Trust and Banking Corp.

Falling stocks on the Tokyo Stock Exchange's First Section outnumbered advancers 1,208 to 181, led by steep falls in the high-tech sector. The NEC Corp. (NIPNY) fell 7 percent and the Fujitsu Ltd. 4.5 percent. Internet investment house Softbank Corp. fell 6.3 percent, along with its subsidiary Yahoo Japan Corp. (YHOO) - down 11 percent. But the pain was felt almost as keenly in the financial and retail sectors.

In the past year, many of Japan's traditional blue-chip technology companies, such as Fujitsu and NEC, have hyped their Internet initiatives, creating heightened expectations among investors. Now corporate restructuring is underway, but it's only having a marginal effect. Masafumi Fujiwara, a tech-fund manager at Daiwa Asset Management, notes that "market sentiment has turned so cold and pessimistic, these corporate [restructuring] efforts have only been considered as minimal factors."

The development of some solid wireless-related technology and consumer devices - like Sony Computer Entertainment Inc's (SNE) PlayStation 2 and NTT DoCoMo Inc.'s i-mode - raised investors' hopes late last year that Japan was catching up to the US in the Internet-era race for tech supremacy.

But the vigour of a few selected industries was not enough to get the stagnating economy back on track.

Japan's shaky political situation has also contributed to the markets' bearishness. Prime Minister Yoshiro Mori is unpopular and there are doubts his Liberal Democratic Party can hammer out the financial reforms needed to resuscitate the world's second largest economy.

Finance Minister Kiichi Miyazawa said the markets' heavy falls were within his expectations and that he had no plans to ask the Bank of Japan to put interest rates back to zero. But his words were belied by his earlier attempt to spread a sense of urgency, in which Miyazawa warned the Japanese public that the country's finances were "approaching a state of collapse."

Miyazawa's comment indicated that Japan must stop its infamous spending on public works projects, which have cost more than US$1 trillion - yes, that's dollars, not yen - over the past ten years. Japan's national debt has reached an alarming 130 percent of gross domestic product.

In other Asian markets, the Hang Seng Index made up steeper losses during the day to end down 2 percent in Hong Kong. In Korea, the Kospi declined 3.1 percent. In Singapore, the Straits Times Index was down 3.7 percent.

Peter Churchouse, a managing director at Morgan Stanley Dean Witter, told reporters in Hong Kong that over the next few weeks the Hang Seng could fall another 600 points to 700 points from its present level of 13,493, because of the Nasdaq volatility.

While the downward trend could continue for some time, low trading volumes suggested that investors were profit-taking, not panicking, according to Alain Barbezat, a fund manager at Darier Hentsch Asia in Hong Kong. "You could call it just a mini-panic for now because the high-flying tech stocks like Cisco Systems Inc. (CSCO) are coming down," he says.

"I think visibility is zero. It's a herd instinct and people are blindly following what the Nasdaq is doing," says Barbezat. "But [despite this] some of the Nasdaq-related stocks, like Samsung (00830) in Korea, actually showed some resilience and outperformed the market there." Samsung dropped, but only 0.8 percent, compared to the Kospi's overall 3.1 percent slide.

Legend Holdings Ltd. (LGHLY) , China's top computer maker, also bucked the trend, managing to rise 4.8 percent while the rest of the Hong Kong market dropped.

Despite the intense gloom, at least one senior fund manager still has hopes for the future. Daiwa's Fujiwara says, "Some global markets might have been reacting too sensitively to the Nasdaq. But I have high expectations for many of Japan's technology companies. The fundamentals of many of these stocks are still strong."

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