The threatened trade war between theUnited States and Japan is just the kind of shock that
economists say could send world stock markets into a tailspin.
    But they are not so sure if that would be a brief
corrective dip, or whether this week's falling share prices
mark the start of a "bear" market.
    "It's the billion dollar question," said Richard O'Brien,
economist at American Express International Bank in London.
    Japan's trade surplus -- 92.7 billion dlrs last year -- has
poured into share and bond markets around the world, and funded
a good chunk of the huge U.S. Budget deficit. Around a third of
any new sale of U.S. Treasury bonds has been bought by the
Japanese. However, Japanese investors have lost money as the
dollar falls and will lose more if the United States lets it
fall further to cut the trade deficit. The counterpart of
improving the trade deficit either through a lower dollar or
because the U.S. Increases duties on Japanese electronic goods,
may be to hit the capital inflow which has financed the budget
deficit.
   And if the U.S. Trade deficit does fall, the Japanese will
have less money to invest. To entice U.S. Investors to fill the
gap that would be left if the Japanese stopped buying U.S.
Bonds, interest rates would have to soar, O'Brien said. The
subsequent shift from shares to bonds could cause major falls
on the world stock markets.
    "A year ago, we could be pretty confident about the markets,"
said O'Brien. "Now, it is much less certain."
    Buoyant share prices are supposed to reflect a booming
economy. But the world economy, with sluggish growth at best in
the industrial nations, a massive load of Third World debt and
huge trade imbalances is not in good shape, said O'Brien.
    Nevertheless, New York analyst William Raferty, of Smith
Barney Harris Upham said  "We're still in a bull market," adding
that corrections are a normal part of a rising market and "The
bear usually strikes slowly."
    Economist Evelyn Brody, at Morgan Grenfell and Co in
London, said the huge sums of money going through the world
financial system will keep a floor under share and bond prices.
    Although interest by the Japanese in putting their money in
non-dollar denominated bonds and stocks has increased it's very
difficult to see where else they can put their money than in
U.S. Dollars and especially the U.S. Treasury (bond) market,
according to David Butcher, a senior executive at Yamaichi
Securities Co Ltd's bond operation in London.
    He said the Japanese are paying much closer attention now
to the French franc and West German mark.
    In the longer run, he worries about what trade tensions and
the dollar's slide will mean for securities markets.
 REUTER
