Japan falls on reform, Nasdaq woes

In this story: Mori's reality 'hard to accept' A 'disappointing' reform package Averting recession for now RELATED STORIES

By Alex Frew McMillan
CNN.com senior writer

TOKYO, Japan -- Japanese stocks plunged heavily Monday, as Japanese Prime Minister Yoshiro Mori denied he planned to resign soon.

Reports over the weekend suggested Mori was ready to step down.

The Nikkei 225 closed 456 points down at 12,171.37. The drop of 3.6 percent took the benchmark index to its lowest figure in almost 16 years.

But strategists attributed the drop to the economic reforms presented on Friday, as well as Nasdaq's renewed woes. They said the effect of Mori's comments was indirect at best.

On Saturday, Mori told top party officials from the ruling Liberal Democratic Party he would bring forward an election for party president from September. He said Monday he was not retiring and his first priority was the budget on April 1.

Mori's reality 'hard to accept'

Experts interpreted his remarks as face-saving steps, to allow Mori to remain in office a few more weeks while the LDP lines up a successor.

They still expect Mori, whose unpopularity is at record levels, to step down.

"The reality of the situation is that Mori is out," said Ron Bevacqua, senior Japan economist for Commerz Securities. "But the reality is hard to accept."

Economists say Japan's political vacuum plagues its markets more than the timing of Mori's resignation.

They also fault the ruling coalition's suggestions for economic reform. LDP officials on Friday presented their proposals for Mori's approval.

A 'disappointing' reform package

The plans include steps to boost stock market investing by cutting Japan's capital gains tax. They also recommend lowering the inheritance tax on stock investments and cutting real estate taxes.

Alex Kinmont, equity strategist at Morgan Stanley Dean Witter, called the package "disappointing." He said Japanese stocks were reacting to the package.

Nasdaq also fell on Friday, which strategists said was spilling over to Japanese stocks. Kinmont said Mori stepping down was a "check-is-in-the-post" issue that was not of central significance.

"The policy package basically had nothing to say," Kinmont said.

Generally, the central issue is "that the LDP as currently constructed neither has a popular appeal nor any idea of what to do next," he said.

Experts fault the reform proposals for failing to address Japan's most serious issues, particularly banking reform.

The LDP again recommended that banks proceed with writing off a vast amount of loans on their books. But the proposals contained no concrete steps to enforce that.

Kinmont noted the recommendation asks the banks to move toward "appropriate disposal" rather than insisting on "final disposal" of the loans. He said that leaves a lot of room for political wrangling and timewasting.

The government's weakness also impedes reform. Any plans still have to be approved by Mori, then passed into law.

Bevacqua at Commerz Securities said the reform plans sounded good on paper. But he said few were likely to make it into law before Japanese elections in July.

He noted that government officials were still not united on their approach to the economy and nor was the government serious about reform.

"I don't think things are bad enough, and I don't think they're scared enough," he said.

Averting recession for now

Also Monday, Japan posted 0.8 percent growth in its gross domestic product for the fourth quarter of 2000. That was better than the 0.6 percent rise analysts had expected.

It warded off a recession, which is technically defined as two consecutive quarters of GDP declines. Japan's GDP shrank 0.6 percent the previous quarter.

But experts view the rise as one-off. They noted that Japan's economy is in serious trouble, even if the latest figures warded off the "R word."

Economists also believe the GDP numbers, which are subject to revision, are unreliable and dated.

"The concern is what's been happening in January and February, not whether the economy was stronger in the fourth quarter," said Richard Jerram, chief Japan economist for ING Barings.

Other indicators, such as industrial production, have shown the economy has turned for the worse in 2001.

A severe slowdown in the United States has hit exports. Corporate spending is also down domestically.

"These figures aren't recessionary, but I think a recession is probably coming," said Peter Morgan of HSBC Securities.

Reuters contributed to this report.

Mori denies resignation plan

Note: Pages will open in a new browser window

External sites are not endorsed by CNN Interactive.