Editorial: Japan gov’t, BOJ must prevent market chaos from impacting real economy

The optimism about the future of the Japanese economy has been abruptly shattered by Aug. 5’s Tokyo Stock Exchange crash alongside the surging yen. The government and the Bank of Japan (BOJ) must heed the market’s warning signals.

On Aug. 5, the Nikkei 225 fell by over 4,400 yen, the largest drop in its history, surpassing even the “Black Monday” crash of October 1987. Meanwhile, the yen rose sharply.

Stock markets in other parts of Asia plus Europe and the United States also plummeted, leading to a simultaneous global stock price decline. Although prices rebounded sharply afterward, an unstable outlook is expected for the time being.

The trigger was the worsening U.S. unemployment figures for July, which prompted concerns the United States is heading for an economic downturn. What had been an upward trend in U.S. share prices went into reverse, and this had knock-on effects in global markets.

This serious turmoil coincided with monetary policy shifts in Japan and the United States. The U.S. Federal Reserve is expected to implement significant interest rate cuts to support the economy. Meanwhile, the BOJ, which announced additional rate hikes in July, intends to continue normalizing monetary policy.

Speculation over a narrowing interest rate gap between Japan and the U.S. could drastically change the flow of money in the markets. The rapid yen appreciation and dollar depreciation are symbolic of this shift.

While excessive yen depreciation leading to soaring import prices is being curbed, the yen’s sudden uptick could put financial pressure on export companies. And although there are concerns from business leaders, it is crucial not to halt the trend toward wage increases.

There is also worry about the impact of declining stock prices on consumer sentiment. The administration of Prime Minister Fumio Kishida has been encouraging the public to invest in stocks through the new Nippon Individual Savings Account (NISA) small-scale tax-free investment system, but the stock market crash has spooked individual investors. It is important to monitor how this will affect household consumption.

The Japanese economy is not currently in significant decline. However, there are fears that the Nikkei index, which hit a record high of 40,000-yen threshold in early July, could plunge again as we transition to an era of positive interest rates. This is because the outlook for corporate performance had been buoyed by ultra-low interest rate policies and a cheap yen.

It is crucial to avoid a situation where market disruptions adversely affect the real economy. The Japanese government and the BOJ must exercise precise control, paying attention not only to the economy and price trends, but also the markets.