Tokyo stock slump

Every economic cloud that appears in the United States seems to produce even gloomier responses in Tokyo. Worries over the yen's recent rebound against the dollar and growing fears that the US economy is heading into recession have been a drag on Tokyo stocks.

The Nikkei 225 average, the most watched index of Asian stocks, fell into bear market territory towards the end of 2007 and is now trading at an 18-month low, 20% below its 2007 peak.

• The stronger yen makes Japanese products more expensive in overseas markets and cuts into profits brought back to Japan. The dollar is hovering around 110 yen, well below the 120-yen mark seen in early to mid-2007.
• The recent release of poor US jobs data will stoke worries that the world's largest economy might be heading into recession.

The misfortune of the United States, which buys more Japanese exports than any other country, affects Japan through the stock market. Since around 2000, fluctuations of the Tokyo Stock Exchange (TSE) price index have correlated with the previous day's change in New York, with the change in Tokyo being double that of New York's. This 'coupling' arises from rising foreign ownership, which amounts to almost a third of TSE shares, and from the large contribution of foreign trading. 

Yet there are reasons for optimism. Fujio Mitarai, chairman of Japan's biggest business lobby, known as Nippon Keidanren, believes Japanese stocks are "oversold" considering healthy corporate earnings and an expected acceleration in Japan's growth later this year.

A US recession and drop in import demand will indeed affect Japan, hurting its US-bound exports and its sales to other Asian destinations. However, exports are only 16% of Japanese GDP, with the United States making up about 20% and Asia 45%. A US slowdown of as much as 5% would have a maximum direct impact on Japan's GDP of about 0.5% through loss of exports. However, as exports to the United States slowed in 2007, other parts of the world have more than made up for the loss. A US slowdown would have a smaller effect than the simple arithmetic implies and the coupling is probably looser than some claim.