Japanese stocks hit 28 month low

One strategist said Yoshiro Mori holding onto office accentuated the fall

By Staff and wire reports

TOKYO, Japan -- Tokyo stocks closed at their lowest point in more than two years on Wednesday, after earlier touching a 15-year low.

The benchmark Nikkei average slid 1.4 percent, or 176 points, closing at 12,883. That is its lowest point in 28 months.

After the close of trade the Bank of Japan cut interest rates by a fraction in the hope of spurring activity in the world's second largest economy.

Japanese stocks suffered from a slide in technology issues and worries about the fragile economy. The Japanese government reported Wednesday that industrial output fell 3.9 percent in January. Economists had expected a slight gain.

Recession risks "very real"

Inventories were also up. Analysts said the data painted an even-gloomier picture of the Japanese economy. They said signs of a recovery had come undone.

"The risk of Japan going back into outright recession is a very real risk," said Garry Evans, a strategist with HSBC Securities. Japan has been flirting with recession, two consecutive quarters of slowing production.

Analysts noted that the broader Topix exchange, down 3.3 percent this year, has fared better than the Nikkei in 2001. The Nikkei, with a heavy technology component, is down almost double.

But equity strategists said both the U.S. economic slowdown and domestic Japanese problems are playing into Tokyo's stock trouble.

Delays for Mori exit, bank reform

Masatoshi Kikuchi, senior Japanese equity strategist for Merrill Lynch, noted the industrial-output numbers showed weakness in export-oriented companies. The U.S. slowdown has hit Japanese electronics equipment makers and auto companies hard.

The poor stock performance heaps increased pressure on embattled Japanese Prime Minister Yoshiro Mori. Kikuchi said the market decline was deepened by media reports that Mori might remain in office for some time.

Market participants had hoped he would resign before the ruling Liberal Democratic Party conference on March 13.

The slow pace of banking reform is also playing into Japanese economic woes. Strategists were hoping banks to announce a restructuring to write off bad debts by the end of March. But there are signs that, too, may be delayed.

Kikuchi said Japanese stocks need three factors before they will see any recovery. Despite lower interest rates, Japan still needs an easing of monetary policy, he said.

The country also needs strong new leadership, he added, and a measure to force banks to dispose of nonperforming loans.

A particularly poor day for techs

On Wednesday, Japanese techs suffered particularly badly. Nasdaq hit a two-year low on Tuesday.

"High-techs took a beating after the Nasdaq fall," said Akihiko Sakakibara, senior fund manager at Sumitomo Marine Asset Management. The index closed down 4.4 percent.

The Nikkei was undermined by falls in fiber-optic makers such as Furukawa Electric Co. On Tuesday, JDS Uniphase Corp, the world's largest supplier of fiber-optic components, said it would cut 3,000 jobs, or 10 percent of its work force. It faces slowing demand and growing competition.

Furukawa, Japan's top optical fiber maker, slid 10.3 percent to ¥1,550 Wednesday as the fiber sector sold off. Furukawa has a 9.8 percent stake in JDS, whose shares had already plunged 15 percent in New York.

Reports of delays in Qualcomm Inc.'s wireless services hurt shares of Japanese suppliers of chips and mobile-phone equipment. Nikon Corp. Nikon, a major chip-equipment maker, dropped 7.0 percent to ¥1,391, after falling 7.49 percent on Tuesday.

"The market here cannot help but react to more U.S. corporate profit warnings," said Hiroyuki Nakai, investment research manager at Tokai Tokyo Securities.

The Nikkei's close was a rebound from an intraday low of 12,784. That was its lowest point since December 1985, when it began its bubble-era run of inflated stock and asset prices.

The capital-weighted Topix index shed 1.07 percent to 1,241.48. That's its lowest close since last Wednesday.

Analysts said the Nikkei could test 12,500 in the near term.

Marc Desmidt at Merrill Lynch Investment Managers said the depressed market reflects a lack of investor confidence in Japan's recovery. Investors outside Japan are particularly skeptical, he said, and the numbers now back that sentiment.

The Bank of Japan said it was cutting interest rates Wednesday because Japan's recovery was faltering. It lowered the overnight money-market rate to 0.15 percent from 0.25 percent.

Analysts said the poor industrial production data allowed the bank to cut rates without seeming to cave in to political pressure.

The selling was particularly aggressive ahead of the Bank of Japan policy board meeting. Experts had expected no change.

Trading was active Wednesday, with 907.92 million shares changing hands on the first section of the Tokyo Stock Exchange. That is the highest level since Dec. 8 last year and up from Tuesday's 833.15 million. Decliners outnumbered advancers 891 to 411.

Reuters contributed to this report.

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