WASHINGTON The waves of selling in Japan's stock market areraising concerns on this side of the Pacific. But so far, the wavethere is barely a ripple here.
Why even care that the Tokyo stock market has plunged 25 percentthis year? Sometimes, the waves keep coming.
On the eve of the stock market plunge here Oct. 18, 1987, NewYork Stock Exchange President John J. Phelan recalled that he couldsee "waves of selling" coming toward U.S. shores from Japan.
The Japanese didn't cause the 1987 "Black Monday" plunge on WallStreet - prices had fallen a lot here the previous Friday. But thereaction in Tokyo showed that the U.S. market is no longer domestic.If foreigners decide to sell big, that can trigger a flood here.
Fortunately in 1987, the Federal Reserve Board moved quickly tosupply credit to the U.S. economy and helped drive interest ratesdown. The tidal wave on Wall Street never reached Main Street.
But the worry lingers because international trading is gettingbigger.
Investing by Japanese, Europeans and American pension funds,insurance companies and other institutions in each other's stocks andbonds in 1979 was just below $100 billion.
That rose to $1.5 trillion last year, up 16-fold, and marketplayers estimate it will grow to $5 trillion by the end of thisdecade.
Despite such linkage, this time the problems in Japan aren'ttranslating into a bust here.
"Fears that a plunge in Tokyo's market would slop over to ourshave thus far proved to be unwarranted. And if it has not yetoccurred, we doubt if it will soon," said William LeFevre, WallStreet investment strategist with Advest.
What makes this time different from 1987, market watchers say,is that events inside Japan are the source of that nation's woes.Its central bank opened the faucet and let credit gush through theeconomy during the past few years.
Awash in money, businesses and individuals bid up the price ofland and stocks.
That raised the threat of infla tion. Alarmed by that, Japan's counterpart to the Fed began toraise interest rates late last year. That helped break the bubble ofspeculation and send stock prices plunging.
But that strong medicine choked trading in Japan's currency, theyen, which began to tumble. Because Japan imports most of its energyas well as other raw materials, the weaker yen drives up the price ofimports and helps make inflation worse.
Hoping to break that spiral, Japan asked the six other majorindustrial nations in Paris earlier this month to help out by buyingyen on foreign exchange markets to firm its price.
But Japan's partners decided to send a different message: Japanis in this jam alone.
Despite Japan's problems, Michael Moran, chief economist withDaiwa Securities America in New York, notes several positive pointsabout its economic prospects.
The stock slump probably won't translate into consumer shock:the national wage negotiations with labor unions have been wrapped upwith an average increase of 6 percent this year, 0.7 percent higherthan a year ago.
And if there is no further steep drop in the stock market,Moran expects the economy in Japan to grow about 4 percent for theyear, not much below his previous forecast of 4.5 percent.
So the outlook is rosy, except for one big difference from1987: the Fed in the United States has much less room to maneuverthan it did three years ago.
Making credit easier would raise an inflation rate that'salready stuck at 5 percent, a bit higher than last year.
That would also weaken the dollar, and the Fed doesn't want thatbecause it would also add to inflation as we spend more on importsincluding foreign oil.
On the other hand, American policymakers want to avoid anyincrease in interest rates in the United States for fear of shuttingdown spending by consumers and businesses and sending a slow-growingeconomy into a recession.
And the Fed doesn't want the dollar to get too strong becausethat makes sales for exporters such as Caterpillar that much tougheragainst the Japanese and other overseas competitors.
So, the Fed continues its balancing act - trying to keepeverything upright on a ship that's tossed and turned by strong windsfrom other lands.
No comments:
Post a Comment