Asia Times: EDITORIAL: Dow 10,000 is fine; Nikkei 20,000 would be better



	March 24, 1999	atimes.com

Japan Economy

EDITORIAL: Dow 10,000 is fine; Nikkei 20,000 would be better

When the New York stock market's Dow Jones index hit 10,000 last week therewere cheers all round - and then the inevitable warnings that this extendedbull run couldn't, wouldn't continue forever. Well, ''forever'' is a longtime and hence one can't very well disagree with such cautions. But thenagain, none other than U.S. Fed Chairman Alan Greenspan, two-plus years and3,000-some points on the Dow ago, warned of irrational exuberance. Aftera few days' jitters, the markets just kept on rising.

Another bull run, begun much more recently and perhaps more uncertain asregards sustainability, has received less attention than the Dow's. Still,since it hit 12-year lows last October/November, the Tokyo stock market'sNikkei 225 average has added a very respectable 3,000 points or nearly 25percent and appears poised for further gains.

That's important and encouraging for two principal reasons: First, itsignals growing market confidence that the worst may finally be over forJapan's recession-plagued economy; second, it comes at a time when allindications are that the European economies are in for a downturn and thatChina may be in for a rough year or two.

Without at least modest recovery in Japan, the entire burden of sustainingworld economic health would rest on the U.S. economy and stock market, andthat's not exactly the kind of risk diversification to inspire prudentinvestors' confidence.

Don't get us wrong. We are not predicting a U.S. economic downturn this yearor a stock market collapse. The American economy, powered by rapidtechnological innovation, is growing at a healthy clip, inflation is nearzero and even the ever-watchful Alan Greenspan has not discerned anysignals that would point toward the need for higher interest rates.

But while the underlying technology-driven productivity gainskeep the American economy humming along inflation-free it is, moreimmediately, continued strength of consumer spending that sustains growth. Andtherein lie both the hitch and the potential risk.

Consumer spending in the first instance is, of course, driven by paychecks.With U.S. unemployment at record lows and wages rising, that part of theequation looks fine. But increasingly, and at the margin that determines theeconomic growth rate, consumer spending has been powered by added wealthderived from stock market gains. Were those very substantial gains inhousehold wealth - $3.6 trillion between the end of 1996 and the end of1998 - to be curtailed or disappear, growth at the current clip would be atrisk.

As said above, we remain bullish on the U.S. economy, and in the longer runthe stock market will track continued economic growth. But U.S. equitymarkets are increasingly driven by technology stocks trading at highprice/earnings ratios averaging around 80 - which induces market uncertaintyand index volatility. Lower than expected earnings by high tech firms coulddeliver nasty (albeit likely short-term) shocks to the market - withlikely consequences for consumer confidence and spending. (When softwaredeveloper Oracle Corp. recently reported revenue growth of ''only'' 19percent, the company's shares took a 23 percent beating on NASDAQ.)

So, let's cheer the recent mini-bull run of the Tokyo market and hope it isa reliable predictor of improved economic performance to follow. Preciselybecause it is driven by high-tech innovation, the U.S. economy (like equitymarkets that track it) is not immune to temporary reversals from some falsestarts and disappointments. A second locomotive would be much appreciatedinsurance, especially if the first should spring an unexpected steam-pipe leak.

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©1999 Asia Times Online Co., Ltd.