Global Credit Crisis Impacts Japan

| October 27, 2008 | 0 Comments

Let me ask you a question.  How well do you remember 1983?  It was an interesting year.  Ronald Regan was President, the US was gripped by Tylenol poisoning in Chicago, the Vietnam Memorial was opening, and unemployment hit 10%.  Believe it or not, the Dow Jones Industrial Average closed trading that year above 1,000.

So why am I asking you about events from 25 years ago?

First, let me ask you another question.  If you could buy stocks today at 1983 prices would you?

I’m asking these crazy questions, because as of today, the Japanese Stock market is now trading at levels last seen in 1983.  Can you believe it?  All of the focus has been on the US markets.  We’re now trading at levels last seen 5 or so years ago.

That’s nothing compared with what Japan’s seen.

So why’s the Japanese market trading at these crazy levels?

I can blame only one thing – the global credit crisis.  Now I know what you’re thinking – “That’s too easy, everyone is blaming everything on the credit crisis.”  You’re right.  The problems in Japan aren’t directly tied to the credit crisis.  But let me show you how these problems are hurting a country half a world away free up bank lending and the flow of capital.

But there’s another problem.

I’m sure you’ve heard of Tsunami – the giant waves which destroy islands and coastal cities.  Who doesn’t remember the Tsunami in 2004? The cause of tsunamis is often times a landslide or earthquake thousands of miles away.  What we are seeing today is a financial tsunami in Japan, caused by the US.

Let me explain.

Most Japanese banks have managed to sidestep the global banking crisis. They avoided the real estate backed securities now causing problems all over the world.  They avoided all the crazy financial structures and high levels of borrowing and leveraging.  That’s why Japanese banks are relatively stable.

But the Japanese market’s down big . . . and that’s caused by the currency.

All over the world, global economies are struggling.  I don’t know of a single major stock market that’s in positive territory this year.  How amazing is that.  There’s literally nowhere to hide your money.  No matter where you invested, you’re showing a loss.

If you think it’s scary here in the US (with a 40% decline) imagine how investors in other countries are feeling.

Some of these market drops are huge.  I’m looking at markets off 50%, 60% or more!  This scares investors from weaker economies into stronger ones.  It’s a move to safety.  I wrote about this a few weeks ago in my article Rate Cuts Around The Globe – Did You Make Money?

To move your investing dollars from one economy to another you need to exchange your currency.

And that’s why we’re seeing investors flock to the US Dollar.  Those not fleeing into the US Dollar are headed into another currency.  The Japanese Yen.  Just look at this chart.  It shows the tsunami of money flowing into Japan.  How big’s the move?  The Yen is now reaching 13 year highs against the US Dollar.
Like most things, there’s also an unintended consequence.

As the Yen climbs, the Japanese economy suffers.  A big portion of the Japanese economy is exporting goods.  That means as the currency goes up exports become more costly.  Higher prices reduce competitiveness on a global market.  This causes corporate sales to fall, and with it, margins.

Corporate profits in Japan are going to be greatly reduced.  Smaller profits means smaller valuations.  And that means stock prices need to fall.

Now, this isn’t some ivory tower theory here.  Just last week, Sony cut earnings forecasts by almost 50%.  Toyota Motor has the same issues. According to one estimate every 1 point rise in the Yen causes the company to lose about $410 million in operating profit. (That hurts!)

Because of the credit crisis, Japan’s literally gone back in time by 27 years!

Now, don’t go rushing out to buy the Japanese market.  This could be a huge long-term problem.  Despite its size, Japan hasn’t shown the economic resiliency the US is blessed with.  I’d hold tight and monitor the economy and the market.  Future buying opportunities may present themselves, but now’s not the time.

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Category: Foreign Markets

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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