Is the recent slump in stocks a temporary correction to the bull market in the U.S., or is it a full-fledged shift in financial currents?
The continuous plunge in stocks listed in the New York Stock Exchange has sent ripples throughout the world, including Japan. The Nikkei Stock Average at the Tokyo Stock Exchange marked a total drop of more than 1,600 yen in two days.
What should be noted is what brought on this drop: the fact that a U.S. government report showed that domestic wages are growing at the fastest pace in years.
This should be good news for the economy. And yet, it led to the biggest decline in stock prices in history.
If the economy continues to improve, there's a chance the pace of interest rate increase set by the Federal Reserve could be sped up -- and it was in anticipation of this that long-term interest rates rose. Fears spread that the interest rate increase signaled an end to the bull market.
This also shows how heavily rising stock prices and asset values have been dependent on low inflation and low interest rate policies.
For Jerome Powell, who was faced with a record-breaking tumble in stocks the day he was sworn in as chairman of the Federal Reserve, it has been a trying week. Delaying a raise in interest rates out of excessive concern for the spooked market runs the risk of triggering full-fledged inflation or an economic bubble. Conversely, if raised interest rates stir investors' anxiety, there could be a negative impact on the economy as a whole.
There were concerns that such challenges could arise when the Federal Reserve and the central banks of other major countries took steps toward massive monetary easing following the global financial crisis sparked by the collapse of Lehman Brothers. It's a paradox: stimulus packages -- which are meant to provide incentives -- are hit by the market's backlash as it heads toward its exit strategy.
This state of affairs provides the Bank of Japan (BOJ), which, compared to the Federal Reserve, has instituted far more drastic monetary easing policies for far longer, with much food for thought.
The beginning of April will mark the end of BOJ Gov. Haruhiko Kuroda's five-year term. He was the one who instituted an unprecedented qualitative and quantitative monetary easing policy, and whether he stays on in his role or is replaced, the market will be extremely sensitive to any possible changes in policy.
Indeed, the yen grew stronger when Kuroda merely expressed a somewhat optimistic view on inflation. That the accomplishment of the ultra-loose monetary policy becomes a cause for concern is a contradiction that is inherent in the policy itself.
Regardless, we have entered a stage in which we cannot expect matters to proceed as they have thus far. Market players and policymakers must be prepared for whatever comes next.