TOKYO -- With the European Central Bank hinting at further easing as early as March, speculation has been rife that the Bank of Japan may follow suit to prop up the stock market.
Global financial markets rallied strongly last weekend, making the question of whether or not to further loosen the monetary purse strings less urgent for now. So far, there have been no major bankruptcies or bank runs. For the longer term, however, it is important to analyze the similarities and differences between the current market volatility and the recent past.
The collapse of U.S. investment bank Lehman Brothers in September 2008 triggered the global financial crisis. Nearly eight years later, global stock markets are under pressure, against a backdrop of a slowing Chinese economy and sagging crude oil prices.
The U.S. was the epicenter of the previous crisis, whereas now China is the source of the trouble. The common thread in both is excessive debt. This year, the U.S. will again face a political transition, as it did in 2008, due to the presidential election.
The difference this time around is that prices for crude oil and other commodities are plummeting. In August 2008, West Texas Intermediate futures were trading near a record $150 a barrel; earlier this month, they fell below $30 a barrel. In the runup to the previous market tremors, Japan and other oil-consuming countries suffered a deterioration in their terms of trade: a transfer of income to resource exporters. Now the opposite is happening.
However, market players are bracing for a global economic slowdown, triggered by the crude oil slump and other difficulties. The dumping of shares by sovereign wealth funds in oil-producing countries is another source of concern.
Enter the bears
Another big difference with 2008 is the source of the market spasms. In 2007 and 2008, many investors lost faith in the value of triple-A rated securities. This touched off a panic and caused liquidity to evaporate in an instant.
This time, the collapse of a stock market bubble in China has added to the problems of excessive debt and doubts about the shadow banking system. But because Chinese financial products, unlike U.S. mortgage-backed securities, are not widely traded globally, the popping of the bubble may not translate to a sudden crisis for global financial system.
Nevertheless, share and commodity prices have declined dramatically since the start of the year. The 2008 crisis was transmitted via the financial markets. This time, concerns over China's economic slowdown are more apparent in the market for goods.
The distinction between money and goods is fuzzy. And the credit crunch brought on by in investors' risk-averse behavior will greatly affect the economy. The current troubles also raise the question of who will carry the global economy forward if China -- which was the engine during the last crisis -- runs out of gas.
Central banks may offer the only way out of the current rough patch by further opening the monetary spigot. ECB President Mario Draghi had already hinted at more easing, while BOJ Gov. Haruhiko Kuroda has said he will not hesitate to take measures if necessary. His counterpart at the Fed, Janet Yellen, is expected to move to soothe market concerns, too. Global equity markets bounced back over the weekend in the belief they will take these steps.
Nevertheless, signs of a bear market have been obvious since the start of the year. In Western stock markets, a bear market is defined as a decline of 20% from a recent peak. European stock markets are entering that territory. The Nikkei Stock Average is nearing a bear market, versus its August 2015 high of 20,808; the index fell below 16,400 at the end of last week.
Stock prices are generally seen as a leading indicator of the economy. With major bourses plunging since the start of the year, it is understandable that central bankers are worried that weak equity prices could lead to a full-blown recession.
If that is the case, they will do everything they can to shoo the bears away. Market watchers are hoping central bankers, including those in China, will join the move.