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SCMP Reporter

WITH stock markets in the Asia Pacific Region racing past their American and European counter-parts, the ailing Japanese market seems painfully out of place.

  Following two weeks of record-setting performances for most regional markets, the Nikkei Index's drop through the critical 17,000-point barrier on Friday stripped away the last remnants of modest hope for the Japanese market.

  But not everybody will see Tokyo's recent dive as an indication to sell.

   Considering most economic cycles guarantee market highs precede market lows, investors might size-up the Japanese index as ''bottomed-out'', offering bargain-hunters a lucrative ride back up into the 20,000 territory.

  ''A lot of investors, especially those wishing to diversify their Asia-Pacific Portfolio, have excluded the Japanese Market for some time, considering it over-bought,'' one Merrill Lynch Tokyo trader said.

  ''Those who still believe the country's overall long-term fundamentals are strong have waited for the market to fall way back down before re-entering,'' he added.

  Potential investors waited until the index dived into the crucial 16,000 territory.

   Taking into account Friday's 496-point plunge, Tokyo's key index lost a total of 1,439 points, nearly eight per cent, since November 19.

  This led Lehman Brothers to reduce its weighting for the Japanese market from 26 per cent, to 10.

  Most economists say Japan's low interest rates, along with the government's pending economic reform proposals, should eventually boost market performance - the important question for investors is when?   ''It's inevitable. Japan couldn't be in a better location amid all the booming Asia Pacific markets, and if interest rates do not get lower than here in Japan, the market is going to have to go up,'' Tokyo dealer with Dredsner Securities, Robert Jameson said.

  ''But we're in a vicious cycle right now and we could very easily see accelerated selling,'' he added.

  Mr Jameson said there was likely to be further unwinding for the market ahead of the expiration of the December Nikkei Futures contracts.

  ''For those investors set on getting into the market, I would recommend some serious thinking. Right now it's like trying to catch falling knives in this market,'' he said.

  According to Mr Jameson, the factors most likely to catalyse Japan's rebound are interest rates and progress on the economic reform policy.

  Potential returns on Japanese stocks, in the near future however, seem highly unlikely.

  ''Let's just put it this way, when the government says the outlook is unclear, that means it is not good. Frankly, I don't see any encouraging signs. The government is still too focused on the political reform bill to concentrate on economic reforms,'' Mr Jameson added.

  He said the government's primary focus on political reforms was much of the reason why the tax advisory panel was having difficulty working out details for the tax proposals and why they may not be able to complete their proposals within the coming weeks.

  Despite the market's crash on Friday, the chairman of the Japanese tax advisory panel, Hiroshi Kato, said while the government understood the severity of rapidly-plunging share prices, a remedy to the situation would take some time.

  ''We want to do it as soon as possible but it will be difficult down the road.

  ''There have been no strong objections to the panel's recent proposal to boost indirect taxes and reduce income taxes, but it will take time to persuade all parties concerned when the panel comes up with specific figures for the tax changes,'' Mr Kato said.

   The spiral downwards gains speed, however, when realising there is more to Japan's sagging market than a dearth of stimulus. Figures released on Friday on Japan's trust banks showed that bad loans to customers which have gone bankrupt were up from six months ago.

  Japan's three long-term credit banks wrote off problem loans worth 187.9 billion yen (HK$13.1 billion) in the first half of fiscal 1993 ended September 30.

  Director of Sales with S. G. Warburg Securities in Tokyo, James Tregear, said that depressed capital spending could further hamper share prices.

 ''With slumping profits, companies or institutional investors are reluctant to make capital investment. As company profits get weaker, investors start pulling out funds in attempt to cover stagnant production and sales, or even bad debt, it is no longer amatter of selling off funds to other markets,'' said Mr Tregear.



Astute players look to Japan for a killing