TOKYO -- Japanese stocks are top-heavy as hopes fade for deregulation and increased spending by the U.S. under the incoming Trump administration, with market players beginning to watch out for a credit crunch following years of easy money.
Awakening to reality
The Nikkei Stock Average slid more than 200 points at one point Monday before ending 1% down at 19,095.24.
Foreigners have slammed the brakes on futures purchases because of continual "negative remarks" by U.S. President-elect Donald Trump, lamented a trader at a major Japanese securities company.
News of the president-elect's latest disconcerting comment, that the U.K.'s departure from the European Union "is going to end up being a great thing," fueled concerns over trade protectionism.
Since Trump's surprise victory in November, hopes for business deregulation and increased federal spending on infrastructure have buoyed Tokyo stocks. But last week, in his first news conference since the election, Trump laid out no specific policy steps, disappointing the market.
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Akihiko Yasui, head of research for Europe and the Americas at the Mizuho Research Institute, warns that the first priority of the U.S. Congress is overhauling President Barack Obama's signature health insurance initiative, which may delay action on spending.
If the U.S. does not quickly carry out the infrastructure investments and tax cuts touted by Trump, money flow into equities and other assets could reverse.
And what is more troubling is that even if the Trump administration does increase spending and enact major tax cuts, a different type of risk -- credit contraction -- may arise.
The bond market would first take a hit, and then the damage would spread to equities markets over the medium to long term, analysts fear.
The expansive monetary policies adopted in the United States after the 2008 financial crisis caused debt to mushroom around the world. In key economies, the ratios of private- and public-sector debt to the gross domestic product have kept rising.
Credit market to ebb next year?
Credit has a 10-year cycle of expansion and contraction, points out Naka Matsuzawa, chief interest rate strategist at Nomura Securities. A new wave of contraction may arrive around 2018, he says.
Monetary easing after the information technology bubble that began in the late 1990s prompted the U.S. to raise interest rates in 2004. Europe and Japan followed suit by tightening their monetary policies. This played a role in eventually popping the real estate bubble in the U.S., leading to the financial crisis.
If the U.S. economy picks up momentum, the Federal Reserve is likely to raise interest rates further to curb inflation. A widened gap in rates between Japan and the U.S. might then weaken the yen to the dollar even more. Then Trump will likely demand that Japan and Europe revisit monetary easing, Matsuzawa predicts.
When advanced economies tighten monetary policies, surplus money in the market starts to disappear. Risk money would flee equities, affecting Japanese stocks as well.
Nevertheless, many say there is no need to be overly pessimistic as the Nikkei index and the Dow Jones Industrial Average are both just below the 20,000 mark.
Indeed, hopes persist that a robust U.S. economy will lead to interest rate increases and consequently shift money from bonds to stocks.
But investors cannot afford to ignore how eight years of credit expansion wind down. In the present age of numerous uncertainties, gauging the impact of a Trump administration on the stock market is more difficult than ever.