US recovery fears hammer Tokyo

JAPANESE stocks were back in freefall after further signs of weakness in the US economy doused hopes of a global recovery that would strengthen order books for the country's exporters.

In early morning trade, the Nikkei 225 index dived almost 3% to 9499, before levelling out to close with a loss of 189.03 points or 1.9% at 9599.1.

The earlier dip below 9500 was triggered by data which confirmed US Federal Reserve chairman Alan Greenspan's warning last week that weakness was now the main danger facing the country's economy.

Other Asian markets were subdued by a waning of consumer confidence among key US consumers in early August and a second month of slower housing starts.

The drooping demand was also reflected in consumer prices, which were stagnant last month. Although the US weakness, combined with dwindling inflation, raises the prospects of lower interest rates later this year, Asian investors fretted over the potential impact of a slowing economy on the sales and earnings of big exporters.

In Tokyo, the biggest falls were among motor and consumer electronics producers, many of which rely on the US market for up to 70% of their demand.

A warning from credit rating agency Standard & Poor's that further delays by the Japanese government in implementing structural reforms could result in a rating downgrade also weighed on the market. S&P said: 'While the government has made limited progress in several areas, many of these painful decisions - such as those concerning public sector reform, fiscal policy and the banking system - have been postponed. Further delays in implementing structural reforms could adversely affect the ratings.'

S&P has downgraded Japan three times in the past two years, most recently in April.