FOCUS: Lehman Brothers' fall sparks concern for Japanese economy

TOKYO, Sept. 16 Kyodo - The collapse of major U.S. securities house Lehman Brothers Holdings Inc. continued to roil financial markets worldwide Tuesday as alarm spread over the fate of other Wall Street names hit by the fallout from the subprime mortgage crisis.

The impact of Lehman's collapse has even reached Japan -- a country relatively
unscathed by the U.S. housing turmoil -- as investors panicked that a further
damper on U.S. consumption could push the export-dependent economy into
recession.
Japan's key Nikkei index plummeted nearly 5 percent Tuesday, closing at its
lowest level in more than three years and outstripping sharp overnight falls in
New York.
The dollar also fell to a near four-month low at the upper 103 yen level in
Tokyo after the fourth-largest U.S. securities house filed for bankruptcy
Monday in New York.
Market experts said the current financial turmoil triggered by Lehman's demise
is likely to hurt U.S. employment conditions and consumer sentiment, leading to
a further slump in the world's largest economy.
''It is undeniable that the U.S. slowdown and a stronger yen will have a
significant impact on Japan's export industry,'' said Norihiro Fujito, a senior
investment strategist at Mitsubishi UFJ Securities Co.
''Japan's direct subprime-linked losses may be small, but its economy will not
sail smoothly considering the negative impact on net business profits,'' he
said.
A stronger yen dents profits Japanese companies make abroad when repatriated.
Market observers also said the dollar is likely to weaken further and could
fall below the 100 yen line as pressure grows for a near-term U.S. interest
rate cut to stem a global credit meltdown.
The U.S. Federal Reserve is widely expected to leave its benchmark short-term
target rate unchanged at 2 percent at its Federal Open Market Committee meeting
Tuesday, while signaling growing downside risks to the U.S. economy.
''Everyone's feeling jittery as they look for who's going to be the next
(victim) so short-term credit markets are barely functioning,'' said Mitsuru
Saito, chief economist at Tokai Tokyo Securities Co.
''What's happening now in the United States is similar to a financial crisis,''
he said.
Saito said the Bank of Japan could be forced to follow suit if the Fed carries
out a rate cut, adding a global liquidity-boosting measure is necessary to
avert a spillover of the U.S.-triggered ''financial crisis.''
The BOJ injected 2.5 trillion yen into money markets Tuesday following similar
measures by the Fed and other major central banks, including the European
Central Bank and the Bank of England.
With a recovery in the U.S. housing market still not in sight, Hiromichi
Shirakawa, chief economist at Credit Suisse in Japan, also suggested Lehman
Brothers failure could ripple across to U.S. commercial banks and insurance
companies.
''Unless the U.S. government decides to inject public funds at a certain stage,
a slowdown in consumption and deterioration in the U.S. economic climate will
accelerate and deepen the impact on the Japanese economy,'' Shirakawa said.
Various media reports said that weekend bailout talks on Lehman faltered after
the U.S. government refused to provide a financial backstop for potential
buyers. The rebuff contrasted with the government's bailout of Fannie Mae and
Freddie Mac a week earlier and its central role in the sale of Bear Sterns Cos.
to J.P. Morgan & Co. earlier this year.
''It's clearly not the case that stability will return to the financial system
by relying on the private sector's independent efforts and market principles,''
Yasunari Ueno, chief market economist at Mizuho Securities Co. wrote in a
research note to clients.
But despite Japan's vulnerability to the global financial turmoil and the
faltering U.S. economy, Tokai Tokyo's Saito said Tokyo markets could be the
first to recover as relatively robust Japanese financial institutions regain
their appetite for investment abroad.
''There are possibilities for investments using Japanese money but there is too
much risk at the moment,'' Saito said.
''Once the falling knives have hit bottom, that will be the moment for Japanese
financial institutions to start moving,'' he said, adding the opportunity could
arrive by next spring.
==Kyodo