Japan's financial markets shaken by political turmoil Stocks plunge 3%

dollar gains on yen MARKETS

June 22, 1993|By Bloomberg Business News

TOKYO -- Signs that the Liberal Democratic Party might be losing its political dominance for the first time in four decades roiled Japanese financial markets yesterday.

Japanese stocks plunged 3 percent and the dollar jumped against the yen after Prime Minister Kiichi Miyazawa dissolved the lower house of Parliament, throwing the country's leadership into a crisis that could reshape postwar Japanese politics.

The political crisis started Friday night when the lower house of Parliament passed a no-confidence vote against Prime Minister Kiichi Miyazawa, forcing him to dissolve the chamber and call a snap election for July 18. About 50 members of Miyazawa's Liberal Democratic Party defected, raising the possibility that the LDP's four decades of political dominance was over.

The no-confidence vote was the fourth since World War II and the first since 1980. Concerns that a coalition government would emerge just when the economy needs strong leadership pushed stock prices lower.

"The private sector is still in a recession, so we have to depend on continuing government policy for an economic catalyst," said Yuichi Matsushita, a strategist at Nikko Securities.

The LDP has long been regarded as the most pro-business party, the force that guided Japan through its postwar economic miracle. The power vacuum left in the government until the July 18 election will hinder the LDP's ability to arrange economic measures speedily just when the economy needs to be nursed into recovery, analysts said.

The benchmark Nikkei 225 stock average fell 592.11 points yesterday, or 3 percent, to 19,212.43, the Nikkei's lowest close since the first day of the current financial year April 1.

(Early today in Tokyo, share prices were mixed, dropping 31.73 points, or 0.17 percent, to 19,180.70.)

"It's not a panic," said Daniel Zbinden, a sales manager at Kleinwort Benson Securities. "But if you want to sell a stock you end up hammering it down because there are no buyers out there."

Traders in both the foreign exchange and the Japanese stock market said foreign investors drove down prices.

A foreign exchange trader at a U.S. securities house said that all the major U.S. institutional investors tried to increase their dollar holdings by selling out their yen.

The dollar closed the Tokyo trading session at 110.70 yen, up from 109.60 yen late Friday in New York, its highest level since mid-May, and traders were predicting levels of up to 115 over the week.

In New York yesterday, the dollar rose to 111.98 yen, its highest level in a month, before finishing at 110.8 yen.

(In early trading in Tokyo this morning, the dollar was trading up, at 111.30 yen.)

The Japanese government bond market also lost ground in the final hour of trading in Tokyo, with the futures contract for September delivery closing down 0.42 yen, at 108.10 yen. Despite the strife in the foreign exchange and stock markets, Japanese government bonds remained fairly stable, said Marshall Gittler, a market strategist at Merrill Lynch.

There was still the risk that foreign investors, who seek foreign exchange as well as investment gains, will decide to pull out of bonds, Mr. Gittler said.

However, as Japan's current account surplus is not about to disappear, there will be new foreign investors replacing them on speculation that after the current jitters subside, the dollar will once again lose ground against the yen, he said.

Investors are concerned that the turmoil could delay discussions on new economic measures. What's more, Cabinet ministers are campaigning in their constituencies through the general elections on July 18. That could delay allocating funds from supplemental budgets passed last August and March.

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