STRONG DOLLAR LIMITS TOKYO STOCK PLUNGE FALLOUT

STRONG DOLLAR LIMITS TOKYO STOCK PLUNGE FALLOUT

The fallout from the Tokyo stock market plunge failed to land on Wall Street, thanks in part to the strength of the U.S. dollar.

The dollar soared against the yen Monday, helping the U.S. stock and bond markets to rally in the face of Tokyo's second-largest stock market decline. The Dow Jones average of 30 industrials rose 38.30 points to 2602.49."The Japanese bubble burst without causing the worldwide crisis we all feared," said Francoise Soares-Kemp, vice president, treasury, and head corporate foreign exchange trader at Credit Suisse in New York.

Tokyo's Nikkei-225 index closed with a 1,569-point loss Monday at 33,321, bringing the cumulative decline in Japanese blue chips to 14.4 percent so far this year.

"The overvaluation of Japanese assets had scared the Japanese themselves," Ms. Soares-Kemp said. "They're (Japanese government officials) not opposed to a decline in the market, because they knew this little party had to come to an end. In a sense, it's a healthy thing."

Susan Babcock, chief corporate foreign exchange dealer at Hongkong & Shanghai Banking Corp. in New York, said the West German, U.K. and U.S. markets "are doing just fine," and that the Tokyo stock plunge is "not threatening to the world."

"This shows there is not necessarily a by-the-nose reaction worldwide, with Japan pulling everybody else down," she added. "Global markets do move in concert, but only when there is a worldwide cause. This is purely a Japanese problem."

The ruling Liberal Democrats managed to maintain their committee heads in the Feb. 18 election, but there is still a lot of political infighting in Japan, with backers of former Prime Minister Noboru Takeshita maneuvering to oust Toshiki Kaifu, she added.

Meanwhile, a Ministry of Finance official has taken on the governor of the Bank of Japan in a widely publicized dispute earlier this month. Makoto Utsumi, deputy minister of finance for international affairs, attacked the central bank's policy of driving up Japanese interest rates.

The Bank of Japan "at some point will have to follow through on what the markets already have done and raise its discount rate by at least three- quarters of a percentage point," Ms. Babcock said. "But there will be an effort not to make it (the rate rise) like a sledge hammer. It will be simply following suit."

Ms. Soares-Kemp said the deflation of assets in Japan, as a result of the stock market plunge, will take care of the inflation problem without an increase in interest rates.

"Raising Japanese rates would be damaging to the United States," she noted. "By holding the line on rates, the Japanese are demonstrating a spirit of cooperation. They are doing themselves some good and sharing responsibility for the health of the global economy."

There also may be no need for West Germany to raise interest rates, Ms. Soares-Kemp added. "There is a natural flow of capital going to West Germany," she said. "They don't need to attract more by interest-rate manipulation."

The yen will have to decline to reflect the move out of Japanese assets, Ms. Soares-Kemp said. "The dollar has probably bottomed out vs. the deutsche mark and has more upside potential vs. the yen," she said.

The yen declined Monday to the lowest level against the dollar since Aug. 17, 1987, despite intervention by the Bank of Japan, which sold between $1.5 billion and $2 billion against yen in Tokyo Monday.

The Federal Reserve also bought yen against dollars in New York Monday, apparently on behalf of the Japanese central bank.

There has been an overall shift of investment from Japan toward Europe, Ms. Babcock said. "But on a percentage basis, there isn't enough money flowing out of Japan to cause the stock market plunge," she said.

The decline reflects "political unrest, a declining trade surplus, declining savings rates and underlying changes in Japanese society," Ms. Babcock said. "The Japanese are learning to end self-denial and to spend more on luxuries. This is a maturing phase in their society and in the market."

Ms. Soares-Kemp said, "The Japanese have tremendously overvalued assets. It's sane and sagacious for them to try to fix that."

Ms. Babcock said the Bank of Japan is worried about inflation, but "the Ministry of Finance calls the shots."

If Japanese assets are overvalued, she said, "you have to ask, overvalued vs. what? Valuation is a relative term reflecting supply and demand. There is a finite amount of land and buildings and a finite supply of stocks."