Last week the DJIA tested the 9000 mark for the first time in history. (Furthermore, the London FTSE reached the 6000 mark and the French CAC tested 4000 for the first time in history.)

As I explained in my previous article, "Dow 9000 & The Shock", historically, when the Dow reaches psychologically important thousand marks and reverses, negative shocks tend to erupt that upset investor's expectations and send stock prices lower. This might recur here at Dow 9000. What sort of shock could occur? Increasingly, it looks as if Asia might be at least the initial catalyst of a stock market reversal from Dow 9000.

Late last week, just as the DJIA was reaching all-time highs near Dow 9000, Japan's stock market and currency were nose-diving due to a spate of bad news about the Japanese economy. First, the Bank of Japan released the widely followed "tankan" survey, which measures business sentiment four times a year. The survey showed that business confidence in Japan has plunged to its lowest level since 1994. Next, on Thursday the chairman of Sony Corporation warned that "the Japanese economy is on the verge of collapsing". His comment came on the heels of a 3.3 percent, 538 point drop in the Nikkei stock average on Thursday. Finally, on Friday the credit rating agency Moody's Investors Service signaled it may downgrade Japanese government debt. Moody's changed its outlook for Japan's economy to "negative" from the previous "stable" - a sign it may be considering lowering its appraisal of Japan's ability to repay its debts.

If one examines charts of the U.S. and Japanese stock, currency and bond markets over the past six months, a notable pattern emerges. Going into early-January of this year, it appears that some sort of panic started to develop concerning Japan. By January 9th, the Japanese Yen and Nikkei stock average were dropping sharply and testing multi-year lows. In association with this, U.S. stock prices started to dive while the long-bond was soaring in price, the latter apparently due to a panic-driven flight-to- quality. Fortunately, any sort of panic abruptly disappeared after January 9th, suggesting some sort of government intervention took place to stave-off an international financial crisis triggered by Japan's faltering economy and banking system.

Now, just as Wall Street's expectations are at the most irrational heights ever, it appears the panic that came to an abrupt halt in early-January is redeveloping with a vengeance. Last week, the value of the Japanese Yen dropped below its January low to the lowest level since 1992. In association with this, Japan's stock market dove nearly 10 percent on the week. The widely followed Nikkei stock average is quickly approaching the critical 15,000 mark that has been support for the market since the bear market in Japanese stocks started in 1989.

The important question here is, if the DJIA is going to reverse from 9000, what bad news is going to precipitate a sell-off in U.S. stocks. As I mentioned in my last article, when the Dow reversed from 1000, 3000, 4000, 7000 and 8000 between 1966 and last year, each reversal was caused by so-called negative "shocks" that upset investor expectations and sent stock prices lower.

Notably, thus far the current situation is a remarkable parallel of the Dow's test of the 3000 mark in 1990. In mid-July of 1990, the DJIA closed at 2999.75 *two days in a row*, and then reversed course, falling twenty percent by October of that year. This sharp reversal from 3000 coincided with Iraq's invasion of Kuwait and a Persian Gulf crisis that sent oil prices soaring- the shock that pushed the U.S. economy into the last recession. Likewise, on Thurday and Friday of last week, the DJIA closed at 8986 and then 8983, i.e., just below 9000 two days in a row. If the pattern that occurred in 1990 is going to repeat here, then the odds are a new shock is about to occur that will upset investor's expectations, push U.S. stock prices lower and possibly trigger a new economic recession.

Since the potential top at 9000 last week coincided with news that Japan's economy "is on the verge of collapse", there is reason to suspect that Japan and the worsening Asian financial crisis will be the source of Wall Street's upset and a reversal from Dow 9000. Indeed, when the Dow reversed from 8000 and suffered a mini-crash last October, it was triggered by Asia's financial turmoil. This time around, however, U.S. stock prices and investor sentiment might not bounce back the way they have since last October.

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     "Sony chairman says Japan's economy on verge of collapse"

                       By MICHAEL ZIELENZIGER
                     Knight-Ridder Tribune News

TOKYO -- In an unusually blunt assessment of this  country's  bleak
financial outlook, the chairman of Sony Corp.  warned Thursday that
"the Japanese economy is on the verge  of  collapsing"  and  echoed
Washington's  call  for the government to move quickly to stimulate
consumer spending.

Sony Chairman Norio Ohga said the new business year, which in Japan
began Wednesday,  will be "very difficult" for the electronics  and
entertainment  giant  if  Japan  isn't  rapidly  pulled  out of its
economic tailspin.  "If consumer confidence continues to  decline,"
he  said,  "we'll face a long spiral of deflation that would have a
damaging effect on the world economy."

For American investors,  Wednesday's pessimistic outlook raised new
questions  about  how much longer the robust U.S.  stock market can
continue to set records while the world's second-largest economy is
trapped in a downward spiral.  (The Dow  Jones  industrial  average
closed Thursday up 118 points,  within spitting distance of 9,000.)
By all indications,  1997 will be the first year in more  than  two
decades in which Japan's economy has actually contracted.

"I  have great concern about Japan becoming a trigger for worldwide
recession," Ohga said,  likening Japanese  Prime  Minister  Ryutaro
Hashimoto to U.S.  President Herbert Hoover, whose fiscal austerity
after  the  market  crash  in  1929  helped  exacerbate  the  Great
Depression.

Ohga spoke to reporters just an hour after the Nikkei  stock  index
fell 3.32 percent,  or more than 538 points,  dragging down markets
in Hong Kong and other Asian nations.  Earlier in the day, the Bank
of Japan reported that  business  confidence  has  plunged  to  its
lowest level since 1994.

The bank's closely watched "tankan" survey, which measures business
sentiment four times a year,  found that Japanese executives expect
manufacturing to slow,  inventory levels to rise and  companies  to
continue having difficulty getting loans from their banks.

Another government agency reported Thursday that household spending
fell  4.5  percent  in  February,  the  lowest since the survey was
launched in 1970.  The survey showed that  Japanese  consumers  are
spending  less  even  though  their disposable income actually rose
slightly.

"We're just starting to see  Japan's  darkest  hour,"  said  Jesper
Koll,  chief  economist  for J.P.  Morgan.  The new data,  he said,
confirms "that the Japanese economy has slipped into  a  very  deep
recession."

Thursday's pummeling of the Nik-kei stock index,  which fell to its
lowest level since Jan.  14, wiped out a big injection of cash from
the  Japanese  government.  On  Tuesday,  the government apparently
pumped $730 million into stocks in order to boost year-end  closing
prices.  The money helped Japanese banks,  which hold much of their
portfolios in stocks, dress up their year-end balance sheets -- but
only for two days.

Prime Minister Hashimoto's ruling Liberal Democratic Party also has
promised to spend $119 billion to  prop  up  the  nation's  sagging
economy,  but  has  yet  to  outline  the  details  of the stimulus
package.  While many in his party want to see the  money  spent  on
traditional  public  works projects,  some insist that tax cuts are
the only way  to  get  businesses  and  consumers  spending  again.
Japan's top corporate tax rates approach 60 percent.

Hashimoto  now  finds  himself  caught  between  demands  for a big
stimulus package and his promise to reduce the government deficit.

Sony Chairman Ohga said  Japanese  politicians  have  ducked  their
global  responsibilities  and  seem to consider only their domestic
constituencies.  "All our businesses  are  operating  on  a  global
scale,"  Ohga  said.  "But  our politicians are purely domestically
oriented. That's where the problem is."

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     "Forecasts about Japan's faltering economy getting darker"

                     Associated Press, 04/03/98

TOKYO (AP) - The head of a top company says  the  economy  is  near
disaster.  A  leading credit rating agency is losing confidence.  A
quarterly survey finds deepening pessimism.

The forecasts for Japan's economy are getting darker.

Tokyo stocks tumbled  today  after  credit  rating  agency  Moody's
Investors  Service  signaled  it  may downgrade Japanese government
debt,  and the U.S.  dollar soared to a six-year high  against  the
yen.

Moody's  changed  its  outlook  for Japan's economy to ``negative''
from the previous  ``stable''  -  a  sign  it  may  be  considering
lowering its appraisal of the Japan's ability to repay its debts.

That  came  a  day after the chairman of consumer electronics giant
Sony Corp. warned that Japan's economy is on the brink of imploding
and could threaten the health of the global economy.

Norio Ohga spoke to reporters Thursday,  shortly after the Japanese
central  bank  released  its  latest  survey showing businesses are
increasingly pessimistic about the state of the country's economy.

``The Japanese economy is on the verge of collapsing,'' Ohga  said.
``If  the economic situation continues to decline ...  this will no
doubt have a damaging effect on the world economy.''

He urged the government to stimulate consumer demand, and said that
simply cutting taxes wouldn't be enough.

``Instead,  we need to do away with taxes related to  purchasing  a
home, even if only for the short term,'' he suggested.

The  Bank  of  Japan's  quarterly  survey  said big companies cited
sluggish economic growth at home and worries about  the  impact  of
Asia's financial crisis for their deepening pessimism.

``I  think  this  is  a  pretty catastrophic report,'' said Russell
Jones,  chief economist at Lehman Brothers Japan  Inc.  ``Japan  is
sliding deeper into recession.''

The survey said there were no signs that corporate confidence would
recover  anytime  soon.  Companies  blamed  the  government for not
implementing  effective  economic  stimulus  measures.  The  report
surveyed 9,308 companies.

``Even  the  U.S.  economy will not be able to maintain its healthy
state'' if Japan's economy continues in its slump, Ohga warned.

Speaking to a press conference after the Moody report's release  on
Friday,   Japanese  Finance  Minister  Hikaru  Matsunaga  said  the
government may move to prop up the yen,  which he said  has  fallen
too far.

The  Moody's  report pushed both the yen and Japanese stocks into a
nosedive by heightening already intense concern about the country's
faltering economy.

The dollar bought 134.56 yen in Tokyo at late afternoon Friday,  up
0.69  yen  from  the same time Thursday and above its late New York
rate of 133.50 yen overnight.  The U.S.  currency rose as  high  as
135.20 yen - its strongest since April 1992.

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                     Global Intelligence Update
                             Red Alert
                           April 3, 1998

 "Sony's Chairman Warns of Impending Collapse of Japanese Economy"

Norio Ohga, Chairman of Japan's Sony Corporation, warned today that
Japan's  economy  was  close  to collapse and that Japan's collapse
could lead  to  a  worldwide  recession.  According  to  Ohga,  the
Japanese  economy  was  facing  its  most  difficult time ever.  He
compared Japanese Prime Minister Hashimoto to Herbert Hoover: "What
President Hoover was saying then,  there are so  many  similarities
with  what  Prime  Minister  Hashimoto  has  been  saying recently.
Hoover triggered worldwide recession.  I just hope remarks by Prime
Minister Hashimoto won't trigger  worldwide  recession".  According
to Ohga, the central problem facing Japan is deflation, driven by a
lack  of  consumer spending in Japan.  Ohga therefore called on the
Japanese government to stimulate the economy,  increasing  consumer
spending and stabilizing prices.

Ohga  has  merely  stated  the  obvious.  Japan  has  been stagnant
throughout most of the 1990s and its condition  is  worsening.  The
Bank  of Japan's "business condition diffusion index," which tracks
business sentiment has fallen to the worst level since  1994.  This
understates  the  problem.  The  extended  malaise  of the Japanese
economy is wreaking structural damage as time goes on.  Both  Daiwa
and  Tokai banks announced cuts in lending to large companies while
it was announced that capital spending in general would decline  in
1998.  As  with the United States in the 1970s,  the decline in the
availability of capital triggered by the banking  crisis  means  an
increasingly  aging  and  less efficient industrial plant.  As this
happens,  Japan's  exports  become  less  competitive,   increasing
pressure  on  the  yen.  As  the  yen declines,  the willingness of
investors to invest in yen denominated paper  declines,  increasing
the capital crisis.

The obvious answer is to stimulate the economy,  as Ohga suggested.
But Japan's  financial  condition  is  much  worse  than  the  U.S.
condition in the early 1980s.  Stimulating consumption must come at
the  expense  of  the  savings  rate.  A  high  savings rate at low
interest is now and has always been the foundation of the  Japanese
banking system. The availability of nearly free money to banks that
are in dire trouble is the only thing that permits them to continue
functioning.  Eliminate  the  constant  infusion of savings and the
banking system would collapse and with it the  inefficient,  linked
companies  who  depend  on  cheap  money  to maintain their balance
sheet.  Increasing domestic consumption is the  long-run  solution,
but  as  the  Japanese bureaucrats understand very well,  it is not
clear how to get  there  from  here.  Increased  consumption  would
stimulate  the  economy,  but only after knocking the bottom out of
the banking system.  Ohga, who heads one of Japan's more successful
companies,  is not completely sensitive to the precarious condition
of most other Japanese companies.

This  means that Ohga's warning should be taken seriously while his
solution cannot be.  Ohga's warning is an important  turning  point
in  the  Japan story,  since it represents a dire prediction from a
leader of the Japanese business community,  someone who  cannot  be
dismissed  as  merely  a  sensationalist  or  alarmist.  If Ohga is
worried,  everyone should be.  The problem is that there  does  not
appear to us to be any way out of Japan's dilemma.  This is not the
first time Japan has faced this dilemma.  During the 1920s,  a very
similar banking crisis took place.  The result  was  a  devastating
recession and the emergence of political extremism.

Until  this  point,  analysts  have been focused on the question of
whether or not Japan can avoid economic disaster.  It has been  our
position  that Japan's economic fate has been sealed ever since the
Japanese government decided to follow a strategy  that  refused  to
deal with the emerging banking crisis--that is,  since around 1992.
Now, Sony's leader has come close to the same conclusion,  at least
in the sense of facing the magnitude of the crisis.  From our point
of view,  the central question is no longer  whether  the  Japanese
economy is facing calamity, but rather what the consequence of that
calamity  is  going to be.  One aspect of this is its effect on the
rest of the world.  We are not certain that  Japan's  decline  will
have  an  enormous  negative  effect  outside  of Asia.  The second
aspect is its effect on Japan itself. Since the end of World War II
Japan has been a liberal democracy,  a system imposed by the United
States.  If  Japan  goes  into  a  depression,  it  will  be a very
different country than the prosperous and cocky Japan of the 1980s.
With that difference will  come  wrenching  political  changes.  We
urge  analysts  to  study  the 1920s in order to get a sense of the
possible evolution of Japan, should Ohga be correct.

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