Friday, March 18, 2011

The Unknown Becomes Known

The real and imagined Tokyo earthquakes are different events: The real earthquake, though more severe than the imagined one, dealt Tokyo only a glancing blow; the financial losses caused by the real quake so far don’t appear to be anything like $1 trillion; and back in 1988 no one considered the possibility of nuclear disaster.
The immediate financial-market response to the actual event is also, at best, a first cousin to the scenario imagined back in 1988. In the fictional catastrophe, the yen rose dramatically as the Japanese government and private insurers sold all sorts of non-yen assets to buy yen, and it is rising now, for instance.
But in the imagined scenario, the Japanese stock market rose in anticipation of a massive stimulus and a glorious economic future. Just now it is collapsing, spectacularly.
There’s a reason for the difference: The market has a lot less faith now than it did in 1988 in Japan’s economic future. The single biggest financial question to arise from the imagined scenario was: Just how screwed will the U.S. be when Japan asks for its money back? It now has been joined by another: just how screwed will Japan be when it reveals that it not only wants but needs its money back?
That is what leaps out at you from the comparison of the real catastrophe with the imagined one: how different the context has become. Back in 1988, it was hard to imagine Japan working from anything but a position of strength: high savings rates, massive trade surpluses, a booming economy and stock market. There was no question then that Japan would bounce back. Today, Japan feels almost doomed.

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