One year has passed since the terrorist attacks that hit New York and the Pentagon. Although the war in Afghanistan ended rather quickly, the danger of terrorism lingers on, and the Bush Administration’s policy of not ruling out pre-emptive attacks has fueled new tensions. The recent slump in stock markets worldwide is a reflection of these tensions.

Basically, money flees from risks. Behind the stock market declines are not just economic problems, but a wide variety of risk factors that are political, military, religious and ethnic in nature. There aren’t enough risk takers, however — sometimes none at all — to support today’s share prices.

I must point out it is the United States that is leading the market slump. In a globalized economy, the problems of one economy will quickly affect those of its neighbor one after the another, just like it did in the Asian crisis in 1997. At the same time, however, national borders do exist, and the impact from the same shock will differ according to each country.

There are two major reasons I think the U.S. is leading the market slump.

One is the political factor: that the U.S. is the nation with the biggest risk of terrorism. It goes without saying that the U.S., the world’s sole remaining superpower after the end of Cold War, is terrorists’ biggest target.

Ironically, even this superpower doesn’t have the means to completely thwart terrorist attacks. Antiterrorism efforts require money. Both the public and private sectors are allocating money that normally should have been spent on “forward-looking” purposes, like tax cuts and capital investments, to fund the “backward-looking” mission of fighting terrorism.

The world, of course, must cooperate on combating terrorism. A pre-emptive attack to defend oneself will be one option if it is confirmed that the enemy is engaged in the development of weapons of mass destruction.

In that case, however, efforts must be made to maintain consistency with the nuclear capabilities of Pakistan, India and Israel. The risk of terrorism will likely increase if the U.S. continues to forge ahead with its unilateralism. Money is more sensitive to political risks than to economic ones.

The other major reason I believe the U.S. is leading the market slump is the economic factor — the collapse of the stock market bubble.

The end of Cold War has provided the U.S. with a dividend of peace and, coupled with the use of information technology, the prosperity of the 1990s. However, the problems that had been overshadowed by the wrong “New economy” theory — that there are no longer cyclical ups and downs in the economy — are coming to the surface, evidenced by the collapse of the bubble in U.S. share prices.

The chart below compares the fluctuations of the Topix index (which stood at 100 at the end of December 1989) during the rise and collapse of the Japanese stock bubble, with the movements of the Standard & Poor’s 500 index (which stood at 100 at the end of August 2000), roughly 10 years later. The comparison shows that the U.S. bubble is following a pattern similar to the Japanese bubble.

There are always, of course, changes in the U.S. and Japanese economies, and a chart alone cannot indicate how things will develop.

But stock market dealers do use such comparisons as a reference. If the Japanese pattern is to be followed, the possibility of U.S. share prices falling 10 percent further from current levels cannot be ruled out.

The Nasdaq index, which mirrored the rise and fall of the dot-com bubble, has plunged to 1,250 from 5,000 in just 2 1/2 years. While the Nikkei stock average took more than 10 years to fall from nearly 40,000 to the sub-10,000 level, the Nasdaq index fell to a quarter of its peak level in a quarter of that time.

Since shares in the U.S. are owned by a wider spectrum of investors than in Japan, it is feared that such a sharp fall will seriously and negatively impact both the U.S. flow and the stock economy. Scandals involving some of the rapidly growing firms have also alienated investors — who are by definition risk takers.

These risk factors have not been observed only in the U.S., but in Japan and Europe as well.

International policy coordination will be a major topic for the International Monetary Fund and major economies at the end of the month, and for such efforts to become effective, a correct understanding of the current situation is essential.

The Misery Index, which combines a country’s jobless rate with the inflation rate for consumer prices, shows there is a head wind at work. If we add the ratio of the fall in stock prices over the past year, something I call the New Misery Index, we get the following numbers: U.S.: 24.7, EU: 25.6, Japan: 7.1. Note that the head wind against Japan is not as strong as it is against the U.S. and Europe.

When Japanese lawmakers debate economic measures in the upcoming extraordinary Diet session, they need to have a correct understanding of the situation and view it in the light of such international comparisons.

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