TRADE WAR FEARS MAY PROMPT STOCK MARKETS' DOWNTURN The threatened trade war between the United States and Japan is just the kind of shock that economists say could send world stock markets into a tailspin. But they are not so sure if that would be a brief corrective dip, or whether this week's falling share prices mark the start of a "bear" market. "It's the billion dollar question," said Richard O'Brien, economist at American Express International Bank in London. Japan's trade surplus -- 92.7 billion dlrs last year -- has poured into share and bond markets around the world, and funded a good chunk of the huge U.S. Budget deficit. Around a third of any new sale of U.S. Treasury bonds has been bought by the Japanese. However, Japanese investors have lost money as the dollar falls and will lose more if the United States lets it fall further to cut the trade deficit. The counterpart of improving the trade deficit either through a lower dollar or because the U.S. Increases duties on Japanese electronic goods, may be to hit the capital inflow which has financed the budget deficit. And if the U.S. Trade deficit does fall, the Japanese will have less money to invest. To entice U.S. Investors to fill the gap that would be left if the Japanese stopped buying U.S. Bonds, interest rates would have to soar, O'Brien said. The subsequent shift from shares to bonds could cause major falls on the world stock markets. "A year ago, we could be pretty confident about the markets," said O'Brien. "Now, it is much less certain." Buoyant share prices are supposed to reflect a booming economy. But the world economy, with sluggish growth at best in the industrial nations, a massive load of Third World debt and huge trade imbalances is not in good shape, said O'Brien. Nevertheless, New York analyst William Raferty, of Smith Barney Harris Upham said "We're still in a bull market," adding that corrections are a normal part of a rising market and "The bear usually strikes slowly." Economist Evelyn Brody, at Morgan Grenfell and Co in London, said the huge sums of money going through the world financial system will keep a floor under share and bond prices. Although interest by the Japanese in putting their money in non-dollar denominated bonds and stocks has increased it's very difficult to see where else they can put their money than in U.S. Dollars and especially the U.S. Treasury (bond) market, according to David Butcher, a senior executive at Yamaichi Securities Co Ltd's bond operation in London. He said the Japanese are paying much closer attention now to the French franc and West German mark. In the longer run, he worries about what trade tensions and the dollar's slide will mean for securities markets.