World share markets took a plunge on Tuesday, suffering their biggest falls since the immediate aftermath of the September 11 terrorist attacks. The slide began in the East with a 3.2 percent drop in the Tokyo market and followed the sun as first European markets, and then Wall Street, fell by between 3 and 5 percent.
While there were particular national factors involved in the decline of each market, the overriding sentiment behind the falls is that the world economy is not making a recovery and may well be sliding into recession.
The Nikkei index set the tone for the day, falling by 3.2 percent to close at 9,217—its lowest level in almost 19 years. Since the peak of the Japanese share market bubble in 1989, the index has lost more than 75 percent.
There was a whiff of panic in Tuesday’s trading as selling triggered more selling, while some investors simply dumped shares in order to obtain cash.
The market may fall still further in coming days in the absence of any initiatives from the government or financial authorities. Japanese Finance Minister Masajuro Shiokawa said the government was not considering any measures to boost prices. The fall was due to weak US equity markets and a global decline, he said, so it was “hard for Japan alone to take stock market measures.”
The major losers were the banks. The biggest banking group Mizuho Holdings sank 9.4 percent, while the Sumitomo Mitsui Banking Corp fell by 7.95 percent. Overall the index for the banking sector dropped by 5 percent.
The sharp fall in the banks reflects concerns over the slow growth rate of the Japanese economy and the impact of deflation on their bad loan problems.
A vicious circle is now in operation. The stagnation of the economy is helping to push down the value of shares. This weakens the financial position of the banks which are some of the biggest holders of company stocks. With their financial position weakened, the banks, in turn, are less inclined to make credit available, leading to further contractions in the economy.
In its report on the Tokyo market, the Financial Times referred to “renewed fears about the debt-infested banking sector” and “further strains on the financial system.” It noted that if the Nikkei falls to below 9,000 the capital adequacy ratio could fall “perilously close to the 8 percent required for international banks.”
According to Ryoji Musha, chief strategist at Deutsche Bank, the sell-off reflected concerns that a global recession may intensify and that economic recovery in Japan was little more than a mirage.
Revised growth figures issued last Friday show that while the economy expanded at 0.5 percent for the April-June quarter, it had contracted for each of the four previous quarters—the first time this has happened since the government began collecting such data in 1980. Initial data had shown that the economy grew in the January-March period.
With prices continuing to fall, businesses are experiencing increasing financial problems. In July, for example, companies went bankrupt at the rate of 58 per day.
Even the Economy Minister Heizo Takenaka acknowledged that the economy was in worse shape than previously thought. “Risks to the economy are growing, and it’s important to watch them closely,” he said. But then, as if to add to general derision with which the government’s fiscal pronouncements are usually met, he continued: “We’ve been saying the economy is picking up, and there’s no change to that view.”
Masanori Hoshina, head of global portfolio marketing at BNP Paribas, commented: “Part of our weakness lies in concerns about the cloudy economic outlook in the US. But the key problem is that there are still no signs of a sustainable economic recovery in Japan.”Europe and the US
When trading opened on European markets the falls were no less severe. The Dow Jones Stoxx index of shares in European companies dropped by 3.8 percent, reflecting falls across the board. In London the FTSE index was down 3.6 percent, the CAC index in Paris dropped by 4.5 percent and in Frankfurt the DAX index finished down by 5.1 percent.
Any hopes that Wall Street would halt the global sell-off were soon dashed as market indexes turned negative. Summing up the situation one funds manager said it was a “broken record” of concerns about the economy and reductions in earnings numbers.
The Dow Jones index ended the day 355.45 points down or 4.1 percent. Of the stocks comprising the Dow, the biggest decline was in Citigroup, the world’s biggest bank, which fell 10.26 percent following a rare “sell” recommendation by Prudential Securities and what were described as “concerns about its corporate governance.”
One of the main factors sparking the fall in the overall market appears to have been the Institute for Supply Management’s index of factor business conditions, which remained at 50.5 for August, amid hopes that it would increase to 51.6 percent. Significantly, new orders, which indicate future growth, were down for the first time since last November.
This is only one of a number of warning signs that the US economy could be slipping back into recession after the first three quarters of negative growth last year. The decline would have been steeper were it not for the increase in consumption spending—up by an annual rate of 6 percent in the fourth quarter of last year and 2.5 percent for the first half of this year.
But increased consumption is being financed by ever-higher levels of debt and cannot continue indefinitely. According to Morgan Stanley economist Stephen Roach, household sector debt is now equivalent to more than 75 percent of US gross domestic product, 10 percentage points above its level of a decade ago. Remarkably, given that interest rates are at a 40-year low, debt-service-to-income ratios are approaching their all time highs.
Financial problems are also growing in the corporate sector. Corporate debt has almost doubled in the past five years from $2 trillion in 1997 to $3.9 trillion at the end of May.
But with the collapse of the financial bubble and the onset of deflationary pressures—price rises in the US are at their lowest level in 48 years—corporate debts are getting harder to repay, an experience with which Japanese firms are all too familiar. According to a report by Moody’s Investor Research, loan defaults amounted to $46 billion in the second quarter, double the volume in the same period last year. For the first half of the year, companies defaulted on $76.6 billion, an increase of 64 percent on the same period in 2001.