The spread of the new coronavirus has caused stock prices to fall globally.
It has been said that stock prices are inflated and seem to be overheating. There is no need to be overly pessimistic at this point.
It is important to keep a cool head while assessing developments in the financial market, taking into account corporate performance and the progress in the state of infections.
On Thursday, the Dow Jones Industrial Average on the New York Stock Exchange dropped by 1,190, dollars the biggest drop ever. Stock prices in countries in Asia and Europe have also plummeted recently, and the benchmark Nikkei Stock Average temporarily fell more than 1,000 yen on Friday.
On the other hand, government bonds in major countries such as the United States and gold, both considered relatively safe assets, are being purchased. This indicates that investors are becoming increasingly concerned that it will be difficult to anticipate the economy's prospects.
There is a major technical factor behind the amplification of the decline in stock prices, given the increase in automated trading using computers.
When stock prices fall to a certain level, a computer program is set up to place sell orders to prevent further losses. In a phase of falling stock prices, selling tends to trigger more selling.
Minimize economic downturn
However, this situation of the new viral epidemic is fundamentally different from the so-called Lehman shock of 2008.
At that time, the prices of high-risk financial products nose-dived, and U.S. securities company Lehman Brothers went bankrupt. Major financial institutions in the United States and European countries, which had a large number of similar products, also faced financial crises.
The Dow Jones industrial average fell about 25% over a period of one month as the financial system was paralyzed and major companies struggled to secure funds.
This time around, the index has fallen about 10%, but there are no problems with the functioning of the financial system.
Unlike the Great East Japan Earthquake, facilities such as factories and machinery were not destroyed. If the spread of the infection is brought to an end, corporate production and trade are likely to recover soon.
In the short term, it will certainly adversely affect the economy. Not only the manufacturing industry, which is having trouble procuring parts, but a wide range of industries, including tourism, restaurants and airlines have been hit hard. There has even been a bankruptcy in Japan.
Each country must minimize the economic downturn. Depending on the circumstance of each country, necessary measures should be taken, such as additional fiscal measures and support for companies' cash flow.
To normalize human movement and production activities while controlling the spread of the infection, it is important for each country to strengthen cooperation.
Increasing concerns about the performance of major corporations in the United States have rapidly heightened expectations in the market for the Federal Reserve Board (FRB) to cut the interest rate. The FRB should not hesitate to support the economy by lowering interest rates when it sees that there is a serious impact on the real economy.
-- This article appeared in the print version of The Yomiuri Shimbun on Feb. 29, 2020.
Read more from The Japan News at https://japannews.yomiuri.co.jp/
