TOKYO -- It has only been about four months since

Yoshiro Mori

took the helm as Japan's prime minister, and yet, during this short period, nothing seems to have gone his way.

Only days after government officials hailed the recent

Group of Eight

summit as an overwhelming success, citizens blasted the premier for spending a whopping 81 billion yen ($743 million) on the venue. (That's almost a hundred times more than what Germany or the UK spent on their summits.) The image of Japan as the maker of top-quality products is diminishing quickly too, thanks to a string of safety-control scandals at numerous automakers and food and beverage concerns. And not only that, Mori's verbal gaffes are so abundant, the newspapers have taken to printing only the juicier ones.

The show must go on, however, and perhaps the most pressing issue Mori needs to tackle is finance. Sure, investors stampeded back into Japan's stock market last year, driving the key

Nikkei 225

index up by nearly 37%, as they figured the economy could not get any worse. In part, they were right. The

Economic Planning Agency's

latest data on consumer spending proved upbeat, rising for two straight quarters, business sentiment is improving, and the central bank is even thinking about raising interest rates because they think the worst is over.

So why did the Nikkei 225 dip to its lowest closing in 16 months on Friday? While it's easy to link the problem to the performance of U.S. stocks, that hardly explains anything. There are so many contributing factors, even market professionals are getting downright discouraged and reluctant to specify what is driving the market down.

Traders reckon the market is moving on sentiment, not fundamentals. It all began when investors who had bought technology shares on margin six months ago started shedding their stakes to cut further losses. Now, with margins being called, key tech shares like

Softbank

are crumbling: The Internet incubator has suffered a 70% drop in its stock price since May. Even firms that are boasting a profit can't seem to do any better. After

Matsushita Electric Industrial

(MC) - Get Report

announced Thursday that first-quarter profit rose 48% from a year earlier to 21.2 billion yen, shares fell 1.9%.

The biggest psychological damage the market is grappling with is the failure of department store operator

Sogo

. Sogo collapsed with 1.87 trillion yen worth of debt, making it the second-largest corporate bankruptcy to date. There are two things irking investors. First, the market -- which is likely to benefit over the long term as some of Japan's crusty, debt-ridden companies disappear -- is dealing with a new notion that the government won't prop up weak companies like it used to, even if that means higher unemployment figures.

Second, investors are worried about another banking crisis. Can major banks afford to pile up additional nonperforming loans if more firms go belly up? After all, the government just rescued the banks a few years ago when they admitted they couldn't pull into the black due to sloppy accounting practices from the go-go bubble era of the late 1980s.

"Banks are insisting that the current round of bankruptcies will have little to no impact on earnings. Unfortunately, the avalanche may be just picking up speed," warned James Fiorillo, analyst at

ING Baring

.

And besides bank shares sliding -- the

Tokyo Stock Exchange's

bank subindex was down 5.4% over the past month -- banks are damaging the market in another way. Due to the adoption of tougher accounting rules this year, banks are working to shed their cross shareholdings in major blue-chips before the fiscal half ends on Sept. 30 to book profits.

Amid all the uncertainty, foreign investors are moving money back home. Foreigners outright sold a total of 131 billion yen worth of Japanese securities in the past week, similar to the amount from the previous week.

Given the performance of Japan funds, that's not surprising: It's hard to be enamored of performances of funds like the

( WPJPX)Warburg Pincus Japan Small Company Fund, down 51.5% to date, and the

( GTJBX)AIM Japan Growth Fund, down 39.4%. Six out of the top 10 worst-performing mutual funds are Japan funds, according to fund-tracker

Lipper

.

That said, investors may see some relief starting at the end of August. The unwinding of cross shareholdings should slow down by then, and new mutual funds are still popping up like mushrooms. In addition, the second-quarter

gross domestic product

, scheduled to be released in the first or second week of September, is reportedly going to show another jump in economic growth.

Yoshiro Mori, We Play for Your...

Since it takes so long to list all of prime minister

Yoshiro Mori's

verbal gaffes, it's not unusual for the local media to actually skip publishing much of the premier's slipups.

However, the one making the rounds in the tabloids these days is so funny, even Japan's teenagers are in tune. The latest blunder goes as such: A few weeks after Mori became premier, he was whisked away on a whirlwind nine-day world tour to meet his respective Group of Eight counterparts.

Upon arriving in Washington to meet

President Clinton

, Mori's aides reportedly rehearsed with the premier what he should say when he first shook hands with Clinton. Although the official meeting was handled by interpreters, Mori's aides reckoned Japan's newest leader would be able to remember a few English phrases.

So the aides got down to work. They instructed Mori to greet Clinton by saying: "Hello, I'm Yoshiro Mori. How are you?" Sounds easy enough. The aides predicted Clinton would then ask Mori how he was. So they told Mori to reply: "I'm fine, too."

Now according to the tabloids, what was actually said turned out to be pure comedy. Instead of sticking to the carefully organized script, Mori reportedly said: "Hi. Who are you?" A baffled but smiling Clinton replied: "I'm Hillary's husband."

And Mori, who doesn't speak a lick of English, replied: "Me too."