Getting Back to Yen

The New York Stock Exchange was not the only exchange to exceed itself last week. In Japan, on the football-field-sized trading floor of the Tokyo Stock Exchange, prices rose until they surpassed their previous peak, set on July 18, 1961. Japan's Dow Jones average --calculated in roughly the same way as the American Dow-Jones but otherwise unrelated -- closed for the day at 1,839 yen ($5.09), ten points above the seven-year-old record.

The Tokyo market's performance reflected the increasing strength of the Japanese economy. This year, despite a 6% rate of inflation, Japan may over take West Germany as the No. 3 nation in terms of Gross National Product, after the U.S. and the Soviet Union. The Japanese government has already twice revised G.N.P. growth estimates for 1968, from the original 7% to 8.5% and, recently, to 9.6%. Exports are expected to reach $13.3 billion, a 23% increase over 1967, and thus turn last year's balance of payments deficit of $535 million into a surplus of about $750 million.

Pretty Flimsy. Conditions were quite different when the Tokyo exchange set its previous record back in 1961. That high, it turned out, was based on pretty flimsy ground and was soon followed by a rapid collapse. Wild speculation by unregulated brokerage houses, which often used customers' portfolios as collateral, was chiefly responsible for driving up prices. When the bubble burst, thousands of investors lost their life savings. Of some 1,500 Japanese securities firms, fewer than 400 survived.

The kind of speculation that led to the debacle seven years ago has now been curbed, notably by the licensing of security firms. Bitter memories of 1961 have also been dimmed by present prosperity. Last year 6% of Japan's population owned securities, and so far this year small investors have poured some $1.9 billion of their savings into the market.

Foreigners, too, are flocking to the Tokyo exchange, despite a 15% dividend tax levied on foreign investors' holdings. U.S. investors are hampered by the 18.75% interest-equalization tax collected by the U.S. government on stock purchases abroad. But others, especially Europeans, are busy buying into Japanese companies at a monthly rate of $21 million, up from an average $5,000,000 a month during 1966. Trading in Sony Corp., a favorite blue-chip stock, has already reached the government-imposed 20% ceiling on shares that foreigners can own in a company.

Tendency to Dilute. Compared with the New York Stock Exchange or sedate European markets, the Tokyo exchange looks like a speculator's paradise. Volume is enormous (it hit a high of 574 million shares last week). Stocks are quoted at what seem to be rock-bottom prices; most shares are below the $1 level. The highest-priced stock, Sony, is selling at about $3.60 a share. But the opportunities are not as splendid as they may seem--mostly because of the tendency of Japanese corporations to dilute the value of their stock by issuing huge quantities of shares. The 1,245 companies listed on the Tokyo exchange now have a total of 91.6 billion outstanding shares. Toyota Motor Co., the country's No. 1 carmaker, has 765 million--almost three times as many as General Motors.

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