By Anne D. Picker, International Economist,Econoday
Monday, September 23, 2002

The Bank of Japan said this week it would buy back equity holdings from the teetering financial sector in an effort to prop it up. The BoJ's action was prompted by worries that all but one or two of the nation's banks are facing capital inadequacy problems. On September 30, Japanese banks will have to calculate their capital adequacy position based on that day's market value of hundreds of billions of dollars in corporate equities - not on the original, and no doubt much higher, purchase price. Japanese equities initially rose on the BoJ's announcement, but then fell off. The international investment community thought little of the BoJ buyback proposal, and for the first time a Japanese bond issue was not fully subscribed at auction. The yen fell as a result. Compounding the problem was that the Japanese government, which seemed surprised by the BoJ action, did not offer any supportive plan.

The Bank of England's Monetary Policy Committee minutes of their September 4th and 5th meeting revealed that the Committee discussed cutting interest rates but ended up voting unanimously to leave rates unchanged at 4.0 percent. They concluded that it would be premature to provide further stimulus to the economy despite signs of renewed weakness in the global economy and tentative signs of slowing consumer growth. The minutes said, however, that the MPC was ready to cut rates if this was required to provide the extra stimulus needed to meet their 2.5 percent inflation target.

OPEC decided to leave their members' production quotas unchanged and will meet again in December to evaluate them again. The cheating on production quotas probably will continue unabated, and while Russia has said they would abide by the OPEC agreement, it did not say what its production level would be. Oil prices remained at about the $30 a barrel level. U.S. production and prices could be affected this week by hurricane Isidore, currently in the Gulf of Mexico. Oil platforms have been shut down and employees evacuated as a safety precaution.

It was a difficult week for equities to put it mildly. Negative news continually tugged at the indexes followed here. At the risk of repeating what has been said over and over in the last several months, worries about earnings, weak U.S. growth and lack of it elsewhere, the continual dialogue about war with Iraq and disagreements between allies, and confusion over Japanese economic and monetary policy all contributed to investor uncertainty. Needless to say, investors ran for the hills. On the week, only the Japanese Nikkei (up 2.6 percent) and the Topix (up 2.0 percent) rose. The rest followed here sank anywhere from 0.8 percent (Singapore straits) to 8.8 percent (Frankfurt DAX).

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