Why Japan should be able to weather a US market crash

What if Wall Street stock prices were to collapse from their current pinnacles under the sheer weight of excessive investment in artificial intelligence (AI)? Would markets in Tokyo and other Asian centres – not to mention Europe and beyond – follow suit?

These are questions that are likely to be put to the test before long if US stock prices continue their strong upward trajectory, interest rates and inflation keep rising and, as seems likely, the US-Israel war against Iran drags on.

What a sharp correction or crash on Wall Street might reveal is how far equity culture has become structurally embedded into economic systems in Asia and beyond. Japan could well emerge as an exemplar in this regard.

At first glance, Japan might appear to be an unlikely candidate. The sheer size of household savings at around 2.3 quadrillion yen (US$14.2 trillion) and the fact that they were long hidden under the mattress or kept in savings deposits became legendary and hardly suggestive of capital market strength. Japan also has a reputation among foreign investors for its cross-shareholdings, wherein a dense web of mutual ties among major corporations and between them and their suppliers, bankers or insurers serves as a defence against foreign penetration and influence.

The reality is different now. Behind the scenes, successive Japanese governments have spent several decades building a financial infrastructure that is more capable of absorbing the nation’s vast domestic savings and foreign capital flows into the economy.

According to Hiromi Yamaji, CEO of Japan Exchange Group, cross-shareholdings have been reduced to the point where they represent less than 10 per cent of total listings on the Tokyo Stock Exchange, compared to over 50 per cent in the 1980s. Yamaji made the remark during a press conference on Japan’s stock market revival held at the Foreign Correspondents’ Club of Japan in Tokyo on July 14.