With the Nikkei falling below 10,000, a collapse in the country's banking system is now imminent
Death is a tiring experience for those who have to witness it. Attitudes to mourning vary hugely across the globe. In some cultures, the deceased is sent off with a riotous celebration of the glorious afterlife to come. In others, a public face of misery is obligatory for months.
In one particularly effective tradition, close relatives are encouraged to openly sob, scream and faint, day and night, for one whole week. They are entitled to tear their clothes, clobber their neighbours or throw food, breaking what are otherwise the strictest taboos. But on the eighth day, they must put their grief behind them and get on with their lives. Most are positively eager to do so.
Investors are exhibiting the same fascinating diversity in their reaction to the ailing stock markets. Some clearly want sudden death, so they can get on to the afterlife. Others reckon a suitably serious period of penance must be endured in order to atone for sins past. Eternal flames are inevitable.
Is there life after death for corporate ghosts? Historically, markets have taken decades to recover from near-death experiences. It took Wall Street 30 years to regain the highs it experienced in the 1920s.
Japan has existed for 15 years with one foot in the grave and the other planted deep in the quicksands of denial. However, it is about to meet its financial Maker. After months, and even years, of promises, packages and pledges, the day of reckoning is near. Forget debate about political reform, fiscal stimulus, monetary bias or corporate restructuring. The Nikkei 225 index, once knocking on 40,000, last week fell below 10,000.
It was at 12,000 in May. The drop has been painful for the companies involved but is even worse for investors, among them the country's domestic banks. At these levels, they are looking down the barrel of a gun. When the Nikkei 225 hits 9,600, banks' capital adequacy ratios go below 10%.
Theoretically, there is still a comfortable 2% to go before the ratios hit 8%, the point at which they will actually have to shut down. But how robust is this margin? Japan's top four banks have just been accused of exploiting accounting loopholes to inflate their revenues and deflect attention from the dire state of their loan books.
Sound familiar? The accounting techniques are not illegal. The true motive for the artifice is difficult to establish. Investors have been told these same banks have been able to absorb non-performing loans because of an increase in operating profits. In other words, they have, unfortunately, been misinformed. Another completely legal ruse is deferring tax assets to boost core capital ratios.
The 'bad apple in the barrel' argument doesn't wash. One of the four banks, Mizuho, is the world's largest in terms of assets. The area under scrutiny accounts for 27% of its reported increase in revenues. The questionable practice is neither isolated nor at the business fringe. Next year, this loophole will be closed, so the revenues it currently facilitates will dry up.
Japan's banks are thumping what they think is the self-preserve button, when it is actually the self-destruct button. Meanwhile, other pressures are building. Japan's export-led recovery is fragile at best. The currency is buoyed by a weaker dollar but lacks any fundamental strength of its own. The government has proved a major disappointment. The Nikkei's fall shows investors are tired of mourning Japan's unfulfilled potential. They just want out.