Nowadays the stock prices in Tokyo Stock Exchange Market are declining, though the Japanese economy is said to have been recovering from the persistent deflationary stagnation. Now many Japanese business people feel unpleasant about such a present economic condition. What does Tokyo market imply about the Jpanese economy? Will the Japanese economy again go to an annoying recession?Today the Yomiuri Shinbun, which is the Japanese newspapers read most in Japan, says,
Stock prices in Tokyo plummeted Thursday due to a fall in the U.S. market the previous day, with the Nikkei Stock Average of 225 selected issues falling to below 15,000 for the first time in about six months. (Jun. 9, 2006)
According to the above, the U.S. stock prices are also now decreasing. Here I will raise one question; does a fall in the U.S. market lead to a decrease in Tokyo market?
There has been a rule of thumb said generally in Japan; "If the U.S. had a sneeze, Japan would have a cold". It means a tight economic relationship between the U.S. and Japan. Certainly now Japan has been trading a great deal of goods and services with the U.S. and vice versa. And thus the business activities in the U.S. have a great influence on the Japanese economy.
It is therefore thinkable that the falling stock prices of the U.S. market result in the decrease in those of Tokyo market because the stock prices reflect the current and future business activities. However I don't know properly the mechanism of how the U.S. market affects the Tokyo market. (If you know the mechanism, please tell me!)
Here is another article implying about how a stagnating U.S. market leads to slumping Tokyo market;
NEW YORK (Reuters) - Shares of Wall Street's biggest brokers, bankers and exchanges fell on Thursday amid a broad collapse in stock prices triggered by fears of rising global interest rates and inflation.
..."This is not a reflection of the current business (on Wall Street). Earnings should be very strong, probably above expectations in most cases," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York. "The market's fear is in the future. Market weakness can often eventually lead to lower trading volumes as investors abandon the market."
..."Markets seem to be concerned the Fed will create a significant slowdown or recession. That would certainly take the edge off some businesses, like equities and credit," said Merrill Lynch brokerage analyst Guy Moszkowski. "Right now, the market is retreating from risk." (Jun.8, 2006)
Three points should we take care of in the above article;
(1) Fears of rising global interest rate and inflation
Rising interest rate lessens the activities of business investment. High interest rate costs more to borrow money, which makes the business people buy less productive machines, build less factories and thus product less.
High inflation, high prices of oil and steel, etc, also makes them product less because they pass higher prices of products on to consumers. Fears of high interest rate and inflation lower production and thus economic activities.
(2) Market's fear is in the future
Stock price shows rather the future economic condition than the current. Stock price is said to be a leading economic indicator. It means a data series that fluctuates in advance of the economy. A decline in a leading indicator signals that an economy is going to a recession more likely. And so a weakening market makes business people expect that the future economy goes to a stagnation.
More important economic feature we'd like to keep in mind about the stock prices is that the expectation of business people affects the current business behavior. This feature is said to a "self-fulfilling" among economists. That is, business people expect the future economic downturn and actually makes the economy turn down.
(3) The Fed's creation of significant slowdown
The Fed chairman Ben Bernanke is reported to think of decreasing inflation. The purpose of the Fed is to stabilize an economy and a finacial market by manipulating money supply. Bernanke sees an inflation rising now in the U.S. economy and comes to think of decreasing inflation to stabilize the prices as the Fed chairman.
Just as economics textbook tells, killing inflation calls for a slowdown of business activities. It is because the Fed decreases money supply. (To the contrary, the Fed increases money supply and thus makes the business activities turn up and inflation higher.)
Rising inflation makes business people expect the Fed creates a downturn by decreasing money supply. The expectation of the future contractionary Fed action, which means the future weakening business activities, reflects the current stock prices of the U.S. market and realizes a fall of stock prices and thus an economic slowdown.
And then Japanese see the stock prices of the U.S. market decreasing and expect the U.S.economic downturn. The expectation reflects the current stock prices of Tokyo market, lowers trading volume with the U.S. and realizes the slowing economic activities in Japan.
Current slumping Tokyo market reflects the future downturn and realizes it more likely.