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August 6, 2024 - 7:00am
It is, to use Trumpian language, a bloodbath. The Tokyo stock market has plunged 12.4%, compounding the misery of last Friday when Tokyo’s financial markets suffered a dramatic plunge of over 2000 points (the second biggest drop in history) in the Nikkei. Some emblematic companies had an especially painful day then — Tokyo Electron lost 11.98%, Isetan Mitsukoshi (Japan’s biggest department store chain) fell 10%, real estate giant Mitsui Fudosan lost 8%, as did Softbank, and Toyota was down 4%. But those hoping last week was just a blip have been dismayed to see the rout has only continued.
The Nikkei is now down nearly 4% from a year ago. In contrast, thanks to the see-saw effect that sees the Japanese currency rise while everything else falls, the Yen gained considerably against the dollar moving from 162 to 142. After a long period of virtual stasis in Japanese finance, many here are in a state of shock.
There are many variables at work, but events in the US were the main factor behind the sudden shifts of the financial tectonic plates. Poor economic data suggesting a faster than expected slowdown raised concerns over a possible US recession, with tech stocks taking a battering. This, plus the prospect of a rate cut signalled by the Federal Reserve for later this year, seems to have triggered the initial tremors in Japan.
As for the seemingly moribund Yen, the currency was suddenly jolted back into life after a long slow decline. This was primarily due to substantial interventions by the Japanese authorities, for whom the continual erosion of the Yen was becoming an embarrassment, coupled with the rate hike by the Bank of Japan last week. These factors, in addition to potential further cuts, kick-started the revival.
The stronger Yen is certainly worrying for corporate exporters, who had grown used to the weak currency profits. But it’s not all bad news. The stronger currency is good for expat savers and Japanese tourists heading overseas. Another potential up-side, at least for those who don’t directly benefit, would be a potential drop-off in the number of tourists to Japan. There have been serious issues regarding excessive tourism and much debate as to whether visitor numbers should be restricted, or a dual pricing system introduced to cope with the hordes of “gaijin” blundering around the temples and shrines and forcing out the locals. The end of Japan’s brief tenure as the world’s unlikeliest budget travel destination would be met with a collective sigh of relief by some.
What happens next is hard to say. Could stocks continue to plunge and could the Yen go even higher? The ongoing events underscore how finely attuned the Japanese currency still is to the vicissitudes of the American economy and geopolitics. A serious financial shock to the US economy, which will inevitably metastasise worldwide, could potentially see the sort of dramatic gains that occurred in the wake of the 2008 global financial crash, where about the only good place to be financially speaking was Japan.
But the implications are surely broader. Tokyo’s woes underscore how interconnected and fragile the global economy now is. If merely worrying, rather than disastrous, economic news from the US can spark a conflagration in Japan, what will happen to global markets, currencies, and even the western security alliance, if something truly calamitous transpires — such as a dollar collapse? Japan, as so often, could be offering us a preview movie of events to come.
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SubscribeI read this morning that the U.S. stock market went down (nosedive?) because of a fear of a recession. That’s the first I’ve heard about a recession. Someone out there explain to me why less than stellar, but not terrible, jobs report means a recession is on the horizon.
Well, we have both a massive AI-driven stock market bubble in the US and a housing bubble across the West. Plus massive unfunded pension liabilities across most of the West. Plus massive bad debts piling up in student loans and auto loans. Most of the money that’s been “invested” in much of this new “tech stuff” will simply have been wasted (check how much money companies like Uber have burnt through – then multiply by how many of these “unicorns” here are/were). One day we’re going to wake up and realise we’re not as rish (or as smart) as we thought we were. The eventual correction will be very sharp and very painful. But absolutely necessary.
I should mention that my lowest grade in college was in Economics 101.
Dismal “science” 🙂
The JOLTS report (which track US employment) is not a good indicator of what’s going on. For example, lots of fake job listings out there – some posted by corporates, seeking to persuade investors things are on the up. Job postings now are only 50% as likely to produce an actual hiring as pre-pandemic. The US has been in recession for about 8 months as measured by more reliable and esoteric measures of employment. If you are interested in learning more I recommend Danielle Dimartino Booth on UTube. Ex-Dallas Fed and typically “on the money” and certainly around employment.
Thanks, a good recommendation.
So on one day, the US economy is strong, unemployment is low and earnings are good. The next day we are to believe everything is collapsing? The BOJ raised interest rates for the first time in 17 years, from zero to .25%, and margin calls spooked the hedge fund community, who have been borrowing money at 0.0% to finance their buying spree. It’s frightening how the entire system is balanced on a razor’s edge.
The interest rates are much higher now—to fight inflation—so how can the hedge funds be borrowing at zero percent? That might have been true five years ago, but now? Talk to people who are trying to buy a house.
You clearly do not follow what’s happening in the world of finance and probably shouldn’t comment on items for which you have no knowledge.
Interest rates are set by each sovereign nation, depending on their individual situation. Mortgages in Japan have been near zero % for many years until this year.
https://www.japantimes.co.jp/business/2023/09/30/housing-loans-rate-rise/
The Nikkei 225 reached nearly 42000 before this drop, up from 17000 just 4.5 years ago. This has been a colossal bull run. With neither amazing prospects or doom ahead, it was ripe for a profit taking correction. In much the same way the near doubling of the Nikkei in 4 years bore no correlation with forecasts for the economy, a drop of 12% also bears no correlation with forecasts for the economy.
The NASDAQ is the same. It’s gone from about 6800 to 18400 over the same timeframe. The underlying prospects of NASDAQ companies didn’t double.
This has been a huge bubble funded by the Fed and other central banks. The interesting thing will be learning where those selling are putting their money – cash, hedges, physical assets, commodities? That is a better indicator of what the selling investors think the next 6-18 months have in store than this stock market drop.
They’ll switch the liquidity spiggots back on (tug of war between Fed and Treasury with Powell doing modest QT whilst Yellen expands the short end) … it will be fascinating to see whether the stock market responds this time. I think not. We know that they have to throw more at the bonfire for less heat at each gyration of the debt cycle ….. and at some point we reach game end. My sense is we’re spiralling faster. Investors I follow are largely in gold, cash, and for people who know what they’re doing, commodities. Property is going to be taxed to smithereens (can’t move it and state bankrupt) – they are focussing on strategic residential (optionality in geopolitical and tax turmoil) and “bunker” planning. Buffett maximally in cash …. Name of the game for these people now: wealth preservation. No one focusing on wealth accumulation. that will come after the fall.
And after the profit taking comes the bounce. Up 10%. The stock market is not a guide to the economy.
Yes, it is a guide but its not an immediate reflection of the present and near future, its a reflection of cumulative views of the distant future and there is never agreement on what that future is because its unknown.
What the stock market does indicate is where the balance of opinion lies amongst people voting with money and not just being blowhards in the pub.
How distant is this future they predict? There have been crashes since the first bourse opened and they didn’t offer any guide to the very far future we live in now. What is the future sweet spot that they predict? Is it 2-3 years from now, or maybe 7-10? If it can’t be quantified then markets are not predictive.
That didn’t age well. Next day and I’m looking at the Nikkei up 10.23%
I hope that Mr. Patrick is not a lecturer in finance or economics at Tokyo University?
The superficially of this “analysis” may appeal to the hopelessly superficial but to more sophisticated consumers of news and opinion pieces, the Free Press has a much more insightful piece from Niall Fergusson.
https://www.thefp.com/p/niall-ferguson-welcome-to-pandemonium