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World: Stock Market News May Be Bad, But Not Fatal

  • Breffni O'Rourke

Prague, 12 August 1998 (RFE/RL) -- World stock markets have plunged once again, strengthening fears that the continuing bout of market volatility may be something more serious than a mere summer storm.

On the New York Stock Exchange, the key Dow Jones industrial average finished 112 points down yesterday after plunging 250 points earlier in the session. In Europe, the London, Frankfurt and Paris bourses were all sharply down, and Moscow crashed by more than 9 percent. In Japan, whose weak economy is at the heart of the present troubles, the market also fell.

The continuing decline of the Japanese yen is a central cause of the turbulence. That's because of fears that a low yen, which increases the competitiveness of Japanese goods, could trigger devaluation of China's currency. This could in turn provoke world recession.

There's little to indicate that there will be any early relief from that fear. Satushi Shimamoto, senior economist with Standard and Poor's in Tokyo, says he expects the Japanese economy to continue its downward spiral until the end of next year:

"From here we will see another slide. That's because the main factor behind such a weak economy in Japan is the sharp downward shift in domestic demand."

Shimamoto says however that he doesn't believe this alone will be sufficient to threaten prosperity in the United States and Europe:

"Right now in the United States the domestic economy is really solid, at the same time Europe seems to be still firm. If you look at the trade figure between Japan and the U.S. and Japan and the EU, we still see strong growth in exports to those regions."

In Frankfurt, the senior economist with the Industrial Bank of Japan, Eckhard Schulte, says he views the overall situation as serious. He says the world must be ready for more turbulence stemming from the Asian region, and that Chinese devaluation is looking increasingly likely.

He expects further stock market declines as investors flee from equities into the safer environment of bonds. But he says there is a positive side to the problem too -- namely that the declines puncture a potential "bubble" which has been developing because of the over-quick rise of stock prices in the West:

"We should not be too concerned about this development, these corrections to the equity market, because what we see here, is from the fundamental perspective quite healthy, and I think key central bankers in the U.S. and Europe will welcome very much these corrections, which are overdue. I expect no long term effects on real economies from this."

Neither Schulte nor other analysts however have an optimistic word to say about Russia. The continuing plunge there is seen as virtually wrecking the market and endangering the government's whole anti-crisis program. Russian deputy finance minister Oleg Vyugin has sought to play down the damage. He's quoted (by Interfax) as saying the drop is temporary and that he there will be a turning point soon. But most analysts don't see it that way. Eckhard Schulte says:

"I am very concerned about Russia, especially because the fundamental situation, fiscal policy, seem to be chaotic, and Russia is very much affected by the fall in raw material prices, and therefore government revenues are shrinking and there's no end in sight. Even if the IMF stepped in, the question is how Russia could improve its fiscal situation sustainably, and I see no answer to this."

Schulte says that the worst-case scenario for Russia would be if the government were to be forced to give up its efforts to support the value of the ruble, and if that happened it would be a major setback for the reform process.

Undeterred by the stock market swings, and in response to the challenges of an increasingly globalized market, the British and American oil giants BP and Amoco have agreed to merge. The $50 billion deal is being called the biggest industrial merger ever. It comes at a time when oil prices have fallen to their lowest level in a decade, and can be seen as a move by the two companies to cut costs in all stages of production, and to prepare themselves for a more competitive environment.