Japan's Market Bubble

THE Japanese newspaper Nihon Keizai, in an editorial last week, held that Japan's stock-market bubble was exploding. This respected publication has been trying to convince readers that shares are overpriced in relation to corporate earnings. Stock prices, measured by the Nikkei Stock Average of 225 selected issues, at that time had lost 2,733.1 points in three days, dipping below 30,000. But, ironically, on Monday the bubble began to swell again - something that doesn't happen in nature. The Nikkei average surged 1,468.33 points, its second-biggest single-day rise ever.

Does this mean the Japanese stock market is out of trouble and that investors in United States corporate shares no longer need fear any echoes from market declines in Tokyo?

Probably not. Though Japanese stocks have taken something of a beating this year, their prices still remain up in the stratosphere by usual measures of market value. The Nikkei average tripled from the end of 1986 to the end of 1989. Though this gain partially reflects the amazing strength of Japan's economy and its energetic corporations, a price bubble still eventually bursts. The hazards for investors in Japanese stocks include these points:

1. Interest rates have risen sharply in the island nation. The yield on a 10-year government bond was 4.2 percent at the end of 1988; it is now around 7.3 percent. So Japanese investors are being drawn away from equities to secure government obligations. Many Japanese equities have price-earnings ratios of 60 or more, more than four times US levels. They offer yields of a minuscule 0.5 percent.

It could be that interest rates will continue to rise as the Bank of Japan continues its efforts to fight inflation.

2. Property and stock-market inflation have been feeding on each other. Many Japanese have been borrowing on high-priced real estate to buy stocks, and borrowing on stocks to finance more real estate purchases.

Notes A.Gary Shilling, a Wall Street economics consultant: ``The two speculative areas have fed each other on the way up, but may prey on each other and compound each other's weakness on the way down.''

The old adage about a ``house of cards'' makes sense for Japanese stock prices.