The expected slump on international stock markets in the wake of the collapse of Yamaichi Securities failed to materialise with investors content to sit on the sidelines ahead of the re-opening of the Japanese stock market early this morning.
While the collapse of Yamaichi with debts of over $25 billion (£16.6 billion) did send shock waves through the markets, trading volumes in most of the major markets were modest and the fall in share prices was, in most cases, less than 2 per cent. Even the hugely volatile Hong Kong stock market failed to react negatively to the news from Tokyo and the Hang Seng Index actually closed marginally ahead on the day.
In London, the market closed down 1.7 per cent while in Dublin - which traditionally tends to lag behind movements on the major markets - share prices were marked down only marginally and there was no rush of sell orders to depress prices unduly. Dealers had been looking ahead nervously to the opening of the New York stock market, but as it emerged, Wall Street's response was also calm, with the Dow Jones down only 50 points at the opening. At the close last night, the Dow was down 113.15 points to 7,767.92.
The impact of the Yamaichi collapse is likely to be most felt in Tokyo and some media commentators in the Japanese capital were speculating yesterday on a fall in the Nikkei of as much as 15 per cent to bring the index to below 14000.
The collapse of Yamaichi will not lead to a meltdown on western markets but will drive funds into safe-haven bonds and bluechip shares, London-based fund managers and analysts said. Pressure from Asian disinflation and devaluation may threaten European and American corporate earnings soon, they said, but the there is little fear that Japan will trigger an immediate markets crisis.
"It is often the case that blood on the streets is a good signal," said Mr Nick Knight, global strategist at Nomura Securities.
The collapse will force the Japanese government's hand, analysts said, bringing on an injection of capital into the banking system.
"If it needs public money it will get it. Central bankers' primary responsibility is to maintain the health of the financial system," Mr Knight said.
Yamaichi's downfall, coming soon after last week's failure of Hokkaido Takushoku Bank, has raised fears that a host of weak Japanese financial institutional will be allowed to fail, analysts said.
Nervous Japanese investors will likely pile into US treasury bonds, counteracting any repatriation of bank-held foreign assets to meet debts, analysts said.
"I think Yamaichi and Japan must be seen in the context of what has been happening in Asia and Korea," Mr Gerald Lyons, chief economist at DKB in London, said.
"An Asian depression is taking place. It has two major international implications. First is a flight to quality and second it reinforces global disinflationary pressure."
Deflation and turmoil in Asia make US fixed-income attractive, Mr Knight said, and a flow of funds into treasuries provides a useful underpinning for Wall Street shares.
"This is going to support the US Treasury yield and yields across Europe," said Mr Shaun Roache, strategist at ING Barings. "People are going to be very wary of Asia as an asset class."
On a longer term view, the collapse of Yamaichi may set the stage for a further round of competitive devaluations in Asia that would have knock-on effects on corporate earnings worldwide.
Japan, desperate for profits amid a round of devaluations from its Asian competitors, may see a serious weakening of the yen, according to several analysts.
Barings is setting a near-term target for the yen of over 130 to the dollar and DKB expects the 150 mark to be pierced in 1998. The yen was quoted at 127 to the dollar in European markets at the close yesterday.
