WESTERN MARKETS UNEASY. Trouble rumbles in Tokyo

Japan's hyperactive stock market is causing growing concern in the United States and Europe at a time when the global economy appears to be undergoing a shift toward higher oil and commodity prices. ``We're in a major trend change,'' says David Hale, an economist at the Kemper Group, a Chicago-based mutual fund company. ``It's potentially hostile to the Japanese economy.''

The biggest problem for Japan: rising costs for raw material, especially oil. Another negative: the strong yen, which is slowing Japanese exports.

If these two trends persist, economists say, Japan could see the cash flow that fueled its robust 1980s growth - and that drove its stock market to dizzying heights - severely crimped. That causes concern among financial hands worldwide.

This is because the major stock markets around the globe are increasingly interconnected, and Japanese investors (mostly insurance companies and pension funds) have parked billions of dollars around the world in other markets. Since much of the speculation on the Japanese stock market has been fueled with borrowed money, a big drop in the Nikkei index could force margin calls on Japanese institutions, meaning they would be asked to come up with more of their own money to back the loans. They might sell assets abroad to do so, and that could affect other markets.

With the Nikkei average (similar to the Dow Jones in the United States) about 24,400 at this writing, everyone uses the word ``speculation.'' Even the Bank of Japan, that nation's stone-solid central bank, talks of transactions that are ``undoubtedly speculative.'' That's the kind of criticism Japan has heard before - and the market has kept on charging. But the consensus seems much more widespread this time.

Kenichi Ohmae, a veteran Japan-watcher with McKinsey & Co., an international consulting firm, writes in the New York Times this week that ``Japan, far more than America, is close to plunging into a depression.'' He says one of Japan's biggest problems is ``plenty of money - but nowhere to invest it except in more money.'' This has driven up the stock market, the property market, the art market, and even frivolous areas such as membership fees at Japanese golf courses, which are now traded like seats on a stock exchange and cost $100,000 to $2 million each.

A downturn in Japan - and a Japanese pullout from the North American or European markets - would probably not be devastating, however. Margaret Patton, a specialist on Japan with Merrill Lynch, points out that US investors make up only about 1 percent of the Japanese market. And in the case of the US, Japanese money constitutes only about $15 billion to $20 billion of the $2.8 trillion in US market capitalization.

If the decline in the Japanese market is modest, North American and European markets could actually benefit, since these will look more attractive to Japanese investors than home does. Recent easing of restrictions of Japanese investments abroad would lubricate the overseas shift. Still, notes Ms. Patton, the appetite of Japanese financial institutions for US Treasury bills could disappear, and this could drive up interest rates, with adverse consequences for the US economy.

``There's genuine cause for concern at current levels,'' she says. ``But it's hard to call it a top.''

Many analysts are verging on doing so, however.

Morgan Stanley Capital International Perspective, which tracks stock markets around the world, pointed to the slowdown of world stock markets in the second quarter of this year and asked, ``Has the Japanese stock market topped?''

Business Week, in an editorial this week, cited ``a fashionable theory circulating on Wall Street that a stock market crash, if one comes, is likely to occur first in Tokyo, then drag the US market down.'' The magazine calls this prospect extreme, but says there is a close correlation between US and Japanese markets - and while there is ``no need to panic ... it's right that US investors should pay attention.''

The Wall Street Journal started the week with a prominent article noting that the volatility and speculation in Japan's stock market were causing great concern in the US.

The Tokyo market has rallied in recent days. Even so, there seems to be a growing consensus in the global financial community that the world is moving out of the disinflationary era into an inflationary one, and Japan is quite vulnerable in this new era.

Japan's economy did well in the early years of this decade, when raw material prices were falling. In 1980, says Mr. Hale at Kemper, commodity imports - primarily oil - cost Japan, which is poor in natural resources, 6.5 percent of its gross national product. Last year, he says, with commodities cheap and plentiful in the world (and with Japan's economy having expanded enormously in six years), only 1.6 percent of Japan's GNP was devoted to commodity imports.

Now, Hale points out, commodity prices are rising. The Commodity Research Bureau's index of key goods is up 25 percent from one year ago, and Hale sees Japan's current-account surplus declining sharply by the end of '88 as a result.

Higher commodity prices affect the US, too. But they are balanced by the good they do in the oil patch, the farm belt, and the mining industry. Japan is not hedged in this way.

Hank Sawa, Prudential-Bache's Tokyo analyst, sees ``nothing but a tough market ahead.'' Even domestic industries - which many Japanese felt would replace export-oriented companies as leaders of the Japanese economy - will be hurt in view of the higher commodity prices, he notes.

Another problem for Japan is that the strong yen is constraining Japanese exports. And aggravating worries about the Japanese financial market are at least two ``structural'' problems:

Speculation and inside trading. Japanese corporations often conspire to bid up stock prices. ``Nothing moves that isn't manipulated,'' a crusading columnist for the Japan Economic Journal has charged.

Many nonfinancial corporations make stock trading a primary profit center. As these corporations benefit from higher stock prices, their own stock rises, creating a kind of skyscraper house of cards. A major hit to the market could bring down all sorts of companies in one fell swoop.

Then there is the concern over price-earnings. This is a good indicator of speculation. One year ago, the average price of Nikkei stocks was 30 times earnings. Prices are now 50 to 60 times earnings. By contrast, in the US, prices are about 18 times earnings.

Paul Aron, a well-regarded specialist on Japanese P-E's who is with Daiwa Securities, contends, however, that in adjusting for accounting differences and other factors, Japanese P-E's are not that far above the US. But they are still remarkably higher today when compared with past P-E's in Japan, other analysts note.