Rumor of Crisis in Japanese Economy

With the Nikkei Stock Index having plunged to a 20-year low, activities of financial institutions and companies are paralyzed, spreading rumor of a ‘crisis in March’ that the Japanese economy might fall into a state of panic.

Although the rumor of crisis has been going around for about three years, wariness subsided for some time. As the stock slump becomes ever more serious, however, the Japanese government has decided to take countermeasures.

The Nikkei closed at 7,862.43 yen Monday, 179.83 yen or 2.24% down from the previous day, after plunging for the previous six consecutive days due to the U.S. war plans in Iraq. It was the first time in 20 years since March 1983 that the 8,000 yen mark was broken.

Most Japanese banks and listed companies settle yearly accounts based on sales by the end of March. A continuous fall in stock prices will result in snowballing losses for banks and companies and will downgrade credit, hurting fund transactions and activities in production and investment.

A 1,000 drop in the Nikkei will lead to a 1% drop in BIS (Bank for International Settlements), which represents soundness of banks. Experts are concerned about the vicious circle that falling stock prices will lead to an increasing loss of banks and companies, worsening financial structure, falling credit, and again, falling stock prices. It is estimated that whenever the index drops 1,000 yen, Gross Domestic Production (GDP) falls by 0.1 percentage point.

According to Data Resources Inc. of Japan, the loss of assets in banks doubled to 6 trillion yen from 2.86 trillion yen in September of last year. Despite expectations that there will be a 71% increase in profits due to improved exports, listed companies will also suffer a loss of 3.5 trillion yen in stock investment, offsetting most of the profits.

Experts point out that falling stock prices will have a negative domino effect, shrinking consumption and further freezing the economy. There are concerns that the Nikkei may plunge to 7,000 yen in the second half of this year.

Japanese banks have decided to provide the financial market with an emergency fund of 1 trillion yen a day in an attempt to increase currency supply and prevent the yen from rising. The Japanese government announced that it will finalize plans on providing public funds for banks in order to keep the economy away from financial crisis.

Liberal Democrats are busy preventing the stock price from falling further, calling for a plan to freeze stock prices at their current state.

However, investors are not satisfied with the plans.

“It is a crisis in the Japanese economic system,” Nikkeiren Chief Hiroshi Okuda said. “Banks should draw up special plans to keep stock prices from falling further, like banks buying shares and company land.”

Also, the measure to keep the yen low, the one that propped up the economy, was of no use. Although the Japanese government has been keeping the yen low to increase exports, the value of the dollar fell due to global uncertainties such as the possible war in Iraq, and the yen to dollar exchange rate has skyrocketed to 116 yen. Experts have stated their grievances against the U.S. that the possibility of war in Iraq has made the matter worse at a time when the nation is struggling to recover from its long-lasting economic slump.

parkwj@donga.com