On August 5, the Nikkei Stock Average on the Tokyo Stock Market plunged to 31,458 yen, down 4,451 yen from the previous weekend. Additional policy rate hikes by the Bank of Japan, deteriorating US economic indicators, and growing expectations of a rise in interest rates by the FRB contributed to the yen’s appreciation and stock price drop in anticipation of shrinking Japan-US interest rate differentials all at once. However, this situation turned around the next day, recording the “biggest price increase in history” this time, which ended at 34,675 yen.

I was certainly surprised by the sharp drop on Monday. It is said that the trigger was the movement of short-term investment funds. In particular, the words such as “since Black Monday” and “biggest price decrease in history” intensified the anxiety. However, the scale of the financial market in 1987 was very different from the current situation. The global outstanding balance of investment trusts was 69 trillion yen as of December 2023, which is 4.9 times the amount of 20 years ago. Total world debt has reached 3.6 times that of the real economy. There is no need to overreact to the situation of money, which is all about offensive and defensive battles for short-term profit margins.

The “stock market increase without growth” caused by the weak yen, which had been brought about by more than a decade of extraordinary monetary easing that originally started with a two-year period, is now reaching its limits. It is therefore not wrong to return to a “world with interest rates.” The stock market turbulence this time is one of the events in the phase of adjustment, and the correction of the extreme depreciation of the yen is a positive factor for small and medium-sized enterprises suffering from rising costs, as well as for stabilizing prices and recovering individual consumption.

On the other hand, the impact on global companies having a high ratio of overseas sales is not small. The corporate earnings that were boosted by the weak yen will result in a loss. However, from a different perspective, the “potential upward trend” that exceeds the company’s ability will simply be eliminated, and if this is covered by wage controls or cost pass-through to subcontractors, the Japanese economy will return to a spiral of stagnation and shrinkage. Global companies are now expected to expand the “sum of profits” of their supply chains and establish international competitiveness that does not depend on foreign exchange. What is questioned is the true ability of the company, and the most urgent measure to be taken is to invest in innovations from a long-term perspective.

This Week’s Focus, August 9

Takashi Mizukoshi, the President