The slowing of the U.S. economy and concerns about a possible free fall on Wall Street, combined with the dimming prospects for Japan's economy, last week sent share prices in Tokyo plummeting to alarming levels. On Thursday, the benchmark Nikkei index plunged to 13,201, its lowest since October 1998.
The downturn in the Tokyo market, which began in late 2000, has hit large banks hard, nearly wiping out the latent profits they hold in stocks. This could slow their efforts to clear remaining bad debts -- which remain considerable -- and force them to limit lending, as they did in the 1990s. A credit squeeze would not only take the steam out of business capital spending, a key engine of growth, but also hurt cash-strapped companies. Some could go bankrupt. Market analysts do not rule out the possibility of a crisis in February or March.
The Liberal Democratic Party on Monday set up a special group to work out emergency measures, and there is talk of "PKO" (price-keeping operations) aimed at shoring up the market with infusions of public money. Given that share prices are basically determined by corporate profitability and interest rates, the case for direct government intervention is weak, because it runs counter to sound market development. Even if it is carried out, its effectiveness is bound to be limited.