Nikkei Drops 11% as Recession Fears Kick In

Asian share markets fell sharply Thursday, led by Tokyo’s 11.4% drop, as economic pessimism rose to the fore and many investors sat on the sidelines.

A day of low trading volume in Asia indicated that investors are waiting to see whether rescue efforts by central banks and government authorities are helping markets. But investors were bombarded again by negative signals coming out of the U.S., as the latest data about consumer spending, bank earnings and demand for commodities suggest that the economy is set to fall into its deepest recession since the early 1980s.

[Pedestrians walk beside an  electric market board in Tokyo, Thursday, Oct. 16, 2008. ] Associated Press

Pedestrians walk beside an electric market board in Tokyo on Thursday, Oct. 16.

“What is hammering home is that people are getting beyond the financial crisis and seeing implications for the broader economy. Growth is looking pretty dismal,” said Bank of New Zealand Currency Strategist Danica Hampton in Wellington.

South Korean stocks sank 9.4%, with Korean financial institutions ending sharply lower, as investors remain jittery about the country’s reliance on short term funding and the precipitous fall in its currency, the won.

Shares in Hong Kong declined 4.8%, while China’s benchmark Shanghai Composite Index fell 4.3%. Markets in Singapore and Jakarta lost 5.8% and 3.8%. Australia, an economy heavily dependent on commodities, plunged 6.7%.

On Wednesday, the Dow Jones Industrial Average dropped 7.9%, setting the stage for another tough day in Asian markets. U.S. stock futures Thursday were down 1.5% to 2% in screen trade, suggesting a further U.S. drop when markets open there. Ebay fell 5.6% after-hours as it cut its fourth-quarter revenue outlook and earnings projections to below what analysts were expecting; also, its Chief Executive John Donahoe said the company expected a “very challenging” fourth quarter holiday season. Earnings reports are due out later in the U.S. from such key names as Merrill Lynch and Advanced Micro Devices.

Analysts and investors expressed impatience with policy measures that have yet to bolster confidence for more than a day or so. While Asian economies are generally perceived to be sturdy, analysts say, Asian stocks aren’t immune from the global reduction of debt and risk.

Adrian Mowat, chief Asian and emerging-markets equity strategist at J.P. Morgan, pointed to ongoing problems in interbank markets as one of the biggest culprits. “If one U.S. bank won’t lend to another, it’s a bit of a moot point asking investors to buy Asian equities,” Mr. Mowat said.

In a slightly unusual dislocation, riskier currencies like the Australian dollar made a cautious recovery against the U.S. dollar and the Japanese yen; some said that was a sign of the return of the market focus to the negatives stacking up against the U.S. economy.

Japan’s Nikkei Stock Average of 225 companies posted its largest stock-market drop in percentage terms since the 1987 stock market crash. It was hurt by declines in financial stocks, plus commodity-linked plays and those with exposure to consumer sentiment and/or a stronger yen.

The Japanese Prime Minister Taro Aso added to the malaise by saying it might take some time before Japanese stock markets stabilize. “The bottom of stock prices is not in sight yet,” Mr. Aso told lawmakers in parliament.

Sony fell 12.9% and Inpex Holdings lost 14.2%, while Elpida Memory dived 16.9% to a limit-low and year-low.

In recent years, growth in the world’s second-biggest economy has been spurred by exporters such as Toyota Motor, Sony and Canon. Consumer spending, on the other hand, has been stymied by stingy wage increases. But lower demand for products has been exacerbated by the strengthening yen against the dollar, which has rendered Japanese exports particularly expensive.

“Nobody wants to buy Japanese stocks. The Japanese market is seen as sensitive to the economic cycle, so when the economic environment deteriorates, foreign investors tend to sell Japanese stocks,” said Masatoshi Kikuchi, an equity strategist at Merrill Lynch.

Japanese equities are now the cheapest in the world according to fund managers surveyed by Merrill Lynch, but fundamental analysis has been thrown out the window as foreign investors pile into safe havens such as bonds or cash. This wholesale flight from risky assets has left about 80% of Japanese companies trading below book value.

In Australia, the share index ended near its lowest level since May 2005, as commodity price weakness hurt mining stocks; BHP Billiton fell 13.1% and Rio Tinto dropped 15.9%, while Woodside shed 5.5%.

New Zealand’s market ended down 4.8% at its lowest level since September 2004; bellwether Telecom sank 8.6% to its lowest level since its 1991 listing, after cutting its profit forecasts.

Korea suffered its biggest point fall in the index’s history as foreigners dumped shares worth 635.4 billion Korean won; KB Financial Group fell the daily limit of 15%, while Shinhan Financial Group lost 11.2%. Steelmaker Posco, shipbuilder Hyundai Heavy Industries, Hanjin Shipping and Korea Line also fell their 15% daily limit.

Hong Kong shipping stocks were hurting the market there, with the Hang Seng Index down 8.4%; China Shipping Development was down 25.1%, China Cosco was off 16.1% and Pacific Basin declined 6.1%.

India’s Sensex was 7% lower after briefly touching a 2008 trough; there wasn’t much support from late Wednesday’s news of another cash requirement ratio cut from the central bank.

Taiwan shares ended down 3.3%, with volume slowing to a four-year low.

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