TRADE WAR FEARS MAY PROMPT STOCK MARKETS' DOWNTURN

  The threatened trade war between the
  United 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.
  

