Monday, 27 October 2008

Nikkei crashes through its support level - a new lesson for British bank bank out package

The close of the Japanese Nikkei 225 share index at 7,162.9 today is deeply significant - see the graph below.
It is being widely reported in the media that the Nikkei has fallen to its lowest levels for 26 years - which is, of course, itself a major development. But even more significant, from a technical point of view, is that the Nikkei has broken through its lowest resistance point since the 18 year slide in Japanese share prices began. This opens up the potential for further falls. The Nikkei is now 81.6 per cent below its peak level at the end of 1989.
The Japanese economy is the second largest in the world after the US in current price terms, and the third largest, after the US and China, in real Parity Purchasing Power (PPP) terms. Therefore such a sustained fall in asset prices is in itself extremely important. But as SEB has repeatedly pointed out there is a direct implications in the path the Nikkei has followed for Britain's proposed bank bail out package.
Any assumption that UK bank share prices have reached their bottom, and that bank shares in Royal Bank of Scotland (RBS), HBOS and Lloyd's TSB will threfore be purchased 'at the bottom of the market' by the government in its proposed bail out, is false in principle - as it is not the job of the UK government to be engaging in risk taking by 'share picking' on the stock exchange. But it is deeply dangerous in practice - as the record of international markets shows that it is entirely possible that the prices of the shares in banks which the government is proposing to purchase can fall far below their proposed purchase prices inflicting huge losses on the taxpayer.
As the Nikkei shows share prices have not at all necessarily reached their bottom and they may remain depressed for very many years. That is why the government must stand ready to take over the functioning of any bank which fails, but it must not be putting at risk loosing tens of billions of pounds of taxpayers money in purchasing shares that may well be trading at present far above their real value once all losses are taken into account.

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