A monitor shows the Nikkei average closing price of 31,458.42 yen on Monday, down 4,451.28 yen, making it the largest single-day drop in history. (©Kyodo)
On Monday, August 5, the Tokyo Stock Exchange (TSE) was in turmoil. At the end of the day, the Nikkei average plummeted by more than ¥4,400 JPY ($29.95 USD) as compared to the previous week's closing price. This was the biggest single-day stock market drop in history, eclipsing the drop following the "Black Monday" crash on Wall Street in the fall of 1987.
This slump in Japanese share prices reflected new concerns that the US economy is losing steam. At the same time, it was also an expression of concern about the abrupt and rapid strengthening of the yen. The TSE floor descended into a state of panic with traders shouting, "Sell, sell!" In the end, the closing price on Monday was ¥31,458.42, down more than ¥10,000 ($68) from the record high just set on July 11.
The momentum for ever-higher stock prices that had prevailed since the beginning of the year vanished in an instant.
Putting It in Perspective
Of course, this correction seems overblown as the economies of both Japan and the United States are not in terrible shape. Since, depending on developments in the US, shares in Tokyo could turn right around and rise, we should not become unnecessarily pessimistic about what the future holds.
Rather, we need to calmly assess the impact that the instability of share prices and exchange rates will have on the real economy. Is there a risk that this stock market mayhem could negatively impact business sentiment and consumption? The government and Bank of Japan (BOJ) should step up their vigilance to prevent the chaos from spreading.
Value of the Yen
The appreciation in the value of the Japanese yen has also accelerated. It had been trending upward since the BOJ's July 31 decision to raise interest rates. Up until now, the weak yen had been putting pressure on household budgets because it increased the prices for imports.
A correction for the extremely weak yen is certainly desirable. But confusion can result if fluctuations in its value are too sudden. It is a concern that the expectation of exporters for profits would be hurt by the strong yen. This appears to have contributed to the stock market carnage.
Diverging Expectations
The wholesale sell-off in Tokyo mirrored the collapse of share prices on US stock exchanges. What we need to recognize is that the economies of both Japan and the US are approaching major economic turning points.
In the US, the Federal Reserve Board (FRB) was already reassessing monetary policy in light of slowing inflation. It is expected to start lowering interest rates as early as this September. Just at that juncture, employment numbers came in softer than expected, intensifying fears of an approaching recession.
Nevertheless in Japan, expectations are high for a virtuous economic cycle for prices and the economy, thanks to widespread wage hikes. That is why the BOJ decided to raise interest rates earlier than expected.
Furthermore, BOJ President Kazuo Ueda has not ruled out further rate hikes this year. That makes the differences in direction being taken by the BOJ and US even starker. All these factors bred doubts within the market.
The government and BOJ are being forced to navigate through troubled waters. It goes without saying that careful policy management and information dissemination are absolutely essential. We hope that they will act appropriately in dealing with any deterioration in the real economy.
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(Read the editorial in Japanese.)
Author: Editorial Board, The Sankei Shimbun
