Nikkei falls 4.5% as dollar tests under ¥103

by Hiroko Nakata and Kanako Takahara

The Nikkei stock average plunged below the key 13,000 line Monday amid the dollar’s sharp dive below ¥103 and speculation that the U.S. is poised to enter a recession.

At 5 p.m. Monday, the dollar traded at ¥102.68-70 in Tokyo, down from ¥104.33-35 at 5 p.m. Friday, marking its first drop into ¥102 territory since January 2005. As of 11 a.m. (GMT) in London, the yen dropped to 102.90-103.00 versus the dollar.

The strong yen trend, which is bad for Japan’s exporters, triggered the 225-issue Nikkei average to drop 610.84 points, or 4.49 percent, to close at 12,992.18 — its lowest closing level since Jan. 23.

The broader Topix index of all first section issues on the Tokyo Stock Exchange fell 53.13 points, or 4.01 percent, to 1,271.15.

Following Friday’s sharp fall on Wall Street after a series of pessimistic economic and corporate reports, as well as high oil prices, Japanese stocks fell broadly across the board Monday led by declines in iron and steel, as well as exporters.

Analysts forecast the weak dollar trend to continue in the weeks to come.

Yoshiharu Nozoe, senior economist at Okasan Economic Research Institute Co., said the dollar may slide below the ¥100 level until the U.S. economy shows signs of recovery.

“At this point, there is no reason for investors to buy the yen,” said Nozoe, indicating massive dollar-selling has been causing the yen’s surge. “The interest rate is low, the economy is weak and the political environment is in turmoil — a situation foreign investors don’t like.”

Analysts predict that if the dollar falls below ¥100, calls will rise from politicians to pressure Bank of Japan policymakers to further slash its key interest rate, which now is at 0.5 percent.

Corporate profits, especially those of export-oriented companies, are likely to diminish due to the dollar’s drop against the yen. The labor market will also be hit if the trend continues.

“The weaker yen had been supporting exporters’ profits. Those companies’ (strong) capital investment shored up the economy. And the economic strength improved employment,” said Seiji Adachi, senior economist at Deutsche Securities Inc. in Tokyo.

“I’m worried that the good cycle may come to a halt because of the dollar’s fall against the yen,” he said.

The importance of exporters to the economy has been growing in recent years as domestic demand, especially personal consumption, remains weak, Adachi said.

The dollar fell by more than 10 percent to the ¥102 level. Last summer the greenback was around ¥115.

This fall may result in a 0.3 percent annual decline in gross domestic product, Adachi said.

Just like other countries, the U.S. economy has a big impact on Japan. Whether the planned tax reduction by President George W. Bush’s administration shores up the U.S. economy needs to be closely watched, said Koichi Haji, chief economist at NLI Research Institute.

“If the U.S. economy recovers as a result, the dollar could bounce back,” Haji said. “But if the U.S. economy remains sluggish, the weak dollar trend will continue.”