That prospect sent shares in some of the country’s largest lenders including Bank of Tokyo-Mitsubishi and Sumitomo to their lowest level

That prospect sent shares in some of the country’s largest lenders, including Bank of Tokyo-Mitsubishi and Sumitomo, to their lowest level in more than a decade.Japan’s 19 largest banks will reduce new lending by as much as 5 per cent in the year ending March because capital is being depleted as they step up disposal of non-performing assets. The benchmark government bond yield fell 10 basis points to 0.715 per cent.Banks may fall below record lows set last week as investors fear that bad loan write-offs and stock valuation losses will force them to constrict credit. It closed on Thursday at 13,197.12, its lowest since January 1986. Institutions such as Bank of Tokyo-Mitsubishi may lead the retreat amid concern that eroding assets will force them to scale back lending.

Global exporters including Sony and Honda Motor may follow close behind if Wall Street continues to wobble.
“We’re caught in not one but two vicious cycles,” said Yosuke Mitsusada at NCG Investment Trust, who expects the Nikkei to fall as low as 12,500 this week. Japanese stocks may sink this week to depths untested for more than 12 years, as investors worry that the ills crippling its economy may be spreading to the rest of the world. “Domestically the credit crunch keeps getting worse, and globally Japan’s financial and economic problems are rippling through other markets.”Bonds should gain as investors seek refuge in government securities, amid concern that banking bills sent to the parliament won’t improve financial stability.The Nikkei 225 index fell 3.6 per cent last week to 13,223.69. He expects the Dow Jones index to slip below 7,000 as investors come to terms with slowing earnings growth.For the week, the Dow average dropped 3 per cent, the S&P 500 index fell 4 per cent and the Nasdaq tumbled 7.6 per cent.Investors will be looking for world leaders to come up with a plan to head off a global recession and ease problems ranging from Japan’s recession to the prospect for a currency devaluation in Brazil.. “It’s not unrealistic to believe we’ll get down into the range of 4.25 per cent,” said Vic Thompson at State Street Global Advisors.Expectations that the Federal Reserve will follow Tuesday’s cut in the benchmark rate with more reductions to keep a recession at bay, along with signs that the US economy is already slowing, adds to the outlook for bigger bond returns.The three-week rally in US stocks spluttered last week, and more disappointing news about the earnings outlook is likely to push prices lower in coming weeks.

Just last week, Gillette said that third-quarter profits will drop 20 per cent because of sluggish sales overseas and lower-than-expected demand for its newest razor.”There’s a partial acknowledgement that earnings are going to be a problem,” said Ned Riley, chief investment officer at BankBoston Corp. Communications equipment makers such as Lucent Technologies led the market lower, along with Lehman Brothers and other brokerages and retailers.Companies will report results for the third quarter over the next few weeks, and earnings won’t be as robust as once expected. Even though yields of 4.84 per cent are the lowest since 1967, few expect that demand for Treasuries will ease soon. “We’re going through a time no one has seen before,” said John Poole at Mellon Private Asset Management “It’s backed by worldwide deflation. It’s incredible.”
Since December, 30-year US bonds have handed investors returns of 21.3 per cent, better than the average 15.8 per cent annual gain posted by the Dow Jones index through the 1990s.

US Treasury bond investors say this year’s 20 per cent plus returns aren’t over yet. Government bonds have become the investment of choice worldwide as people seek an alternative to all types of other securities amid concern that financial market turmoil will trigger a global economic slowdown. Analysts said a series of economic reports due this week – including money supply growth, industrial production and surveys on service industry activity and retail sales – aren’t likely to derail those hopes.The benchmark 9 per cent 10-year UK government yield fell 40 basis points last week to 4.62 per cent.. Gilts “will remain well-bid because the market has grown very bullish on the prospect of a rate cut before too long,” said Phil Tyson, market strategist at HSBC Markets. “We don’t expect the Bank to ease this time around, but there’s a feeling that it’s only a matter of time” before rates fall.While only four of 21 economists surveyed expect rates to be cut on Thursday, 18 see lower rates by the end of the year. A cut in rates will boost demand in about 18 months’ time, but people are worried about what’s going to happen in the interim,” said Vanessa James, fund manager for Legal & General. Still, “the more people that cut interest rates in developed countries has got to be positive,” she added.Barclays dropped 15.6 per cent last week and Lloyds dropped 9.8 per cent.