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U.S. oblivious to Japan?
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April 2, 1998: 3:00 p.m. ET
Woes of Japan markets once struck fear in U.S., but now bring shrugs
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NEW YORK (CNNfn) - Dire economic warning signs from Japan used to be enough to send investors around the world scurrying for cover, but on Thursday those same warnings were all but ignored as the Dow marched toward 9,000.
A Bank of Japan "tankan" survey released Thursday showed that businesspeople at all levels in Japan see weakening demand for its products and worry about the country going forward.
At the same time, the chairman of Japanese electronics company Sony Corp., Norio Ohga, said the country's economy is "on the verge to collapse." Perhaps predictably, Japan's stock market on Thursday retracted with the benchmark Nikkei index falling more than 3 percent.
However, over in the United States, the Dow Jones industrial average showed little hesitancy in moving higher.
Japan is considered one of the economic success stories of the postwar world, its name synonymous with a smoothly running, powerful economic machine. However, a banking crisis lasting seven years has slowed the country down, and overseas investors have taken note.
The process has created what analysts consider a "flight to quality" among investors from Japan to Europe and the United States.
"The rest of the world seems to be in decent shape on the domestic front," said Sandy Batten, senior international economist with Citibank Global Asset Management. "Their domestic economies are doing well enough that they don't expect anything out of Japan."
Analysts assert that Japan matters less than it used to in terms of U.S. and Europe market psychology. Conversely, bad news from Japan may even further bolster overseas markets, according to Bill Meehan, senior market strategist at Cantor Fitzgerald & Co.
Meehan feels that when investors hear about problems in Japan, they may begin to anticipate burgeoning interest in the United States and attempt to get in on the action as well.
Ironically, the move of investment out of Japan could be even worse except that the country's citizens have less flexibility to take their money out of Japan's markets and move it overseas. However, proposed changes in regulations may allow them to do so.
Another inverse relationship helping out U.S. markets has been the decline in Japan's yen and the resulting rise in the dollar because a stronger dollar tends to attract overseas investment and also bolster the U.S. bond market.
Japan has made attempts to pull itself out from its economic problems. In fact, some say, it has made too many attempts, introducing five fiscal packages in the last six months.
The nation's banking crisis has its roots in a lending frenzy which occurred when the country's real estate market was booming. However, that so-called "bubble" market burst and many banks were left with bad loans they were unable to collect.
Economists have blamed Japan for prolonging its crisis by showing reluctance in writing off bad debts, which often occurs much more quickly in the United States.
Although Japan's woes seem to be having a positive effect on the U.S. and European markets, its neighbors in Southeast Asia have not been so lucky. While the nature of the financial troubles of these Southeast Asian nations (overextended finances and currency problems) differ from Japan's, they cannot look to Japan as a market for their goods.
On Thursday, Michael Camdessus, managing director of the International Monetary Fund, said that "Asia will not be out of the tunnel until the Japanese economy recovers."
And while the United States markets may, for now, gain an advantage from Japan's woes, the loss of eager Southeast Asian buying markets may be a long-term effect that the United States cannot shrug off.
-- by staff writer Randy Schultz
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