Japan sweats as U.S. rescue stalls

by Hiroko Nakata

The uncertainty swirling around the financial crisis in the United States has sparked concerns in Japan that more bad news is on the way for exporters, consumption and the economy, analysts said Tuesday.

The U.S. House of Representative’s shocking rejection of a $700 billion rescue plan Monday sent Wall Street into its worst single-day plunge — on a points basis — and triggered a 483-point selloff in Tokyo stocks Tuesday.

“The situation is getting quite serious,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “All we can do is to wait for an amendment to the U.S. bailout plan.”

Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo, said the crisis is just the beginning of a long rocky road for the rationalization of U.S. financial institutions.

Even if Congress passes a reworked version of President George W. Bush’s bailout package, which is designed to buy up toxic debt and shore up the crumbling financial industry, it will have stronger control of public fund injections. This means U.S. financial players will have to get by through more mergers and acquisitions, Shirakawa said.

A slowdown in the U.S. will inevitably hurt Japanese manufacturers, he said.

“If the U.S. personal consumption weakens, it will hurt sales of automobiles and home electronics,” he said.

Japanese exporters, which play a big role in these sectors, will see profits decline, he said.

Shirakawa also said that a much weaker U.S. could be expected to impact emerging economies, which many exporters were counting on to pick up the slack as the U.S. slowed. “There could be a domino impact on the world economy,” he said.

The stronger yen also poses a threat because it will eat into the earnings of exporters, the main engine of Japan’s economy. A sharp fall in stock prices will also hurt domestic consumption, Dai-ichi’s Kumano said.

He said the Nikkei 225 average could drop below the 10,000 line and that the yen could reach 100 to the dollar.

He said any positive impact that Japan expects from falling crude oil prices could be offset by the negative impact of the yen’s appreciation.

And that impact may not end here.

If U.S. lawmakers call for reducing taxes and fiscal spending, its fiscal deficits could swell and hurt the U.S. bond market, which could sap the health of Japanese financial institutions, said Shirakawa of Credit Suisse.

Cheaper U.S. bonds and a weaker dollar will hurt the balance sheets of Japanese financial entities because they hold huge amounts of dollar-denominated assets, he said.

“There is a risk that Japanese financial institutions will tighten their credit stances,” which would slow Japanese business activity, he said.

Kumano said the Japanese financial firms who decided to invest in troubled U.S. investment banks recently may feel more heavily burdened as the U.S. financial crisis continues. Nomura Holdings Inc. bought the Asian, European and Middle Eastern operations of failed Lehman Brothers Holdings Inc., while the Mitsubishi UFJ Financial Group Inc. has made a $9 billion investment in struggling Morgan Stanley.

“But I don’t think their investment was a mistake,” Kumano said. “In the long term, it must be a business chance because Japanese institutions are taking less financial damage” from the subprime-mortgage loan problems.