So both Japan and the U.S. have endured credit rating downgrades this month, but the world markets have reacted very differently to them.
To the U.S. downgrade, markets dropped as investors got nervous about another global recession. To the Japan downgrade, investors (at least on the Nikkei) just went on with business as usual, for the most part.
Why?
There are obvious differences between the U.S. and Japanese economies as well as the states of the nations, but they’re not far apart on the global economy scale. It’s curious that the markets reacted so differently. I mean, on most GDP rankings, the U.S. is number one and Japan is number three (amazing considering it’s a tiny island nation with almost no natural resources).
Japan is still reeling from the tsunami and nuclear disaster in March, which would point toward a bigger reaction to the downgrade. Some experts say the Japanese economy will rebound in the second half of the year, but production hasn’t come back like they thought.
According to the Guardian, production dropped nearly twice as much as analysts predicted in the first three months of the year. Production for the whole year might be half what analysts thought.
But the Japanese are forecasting a 1% growth in the economy between now and the end of the fiscal year in March 2012, according to the Guardian. Most of the production slump, they say, is from supply issues after the disaster, which should resolve themselves during the course of the year.
The debt between the U.S. and Japan is different, too. While the U.S. owes a huge part of its debt to foreign investors like China, the Japanese own nearly all of their own debt.
That means the Japanese don’t have to worry about outside investors putting their companies out of business by calling in their debts. It gives them a measure of security while they implement their reconstruction plan over the next 5 to 10 years.
Investors are evidently still confident in Tokyo and feel the country will rebound. Investors are also still confident in U.S. bonds, still seen as one of the most stable investments around.
So why the discrepancy?
Well, the markets are emotional. For one thing, when investors see the world’s leading economy falter, it’s a psychological blow. It’s obvious that China is on the rise and will likely take over the U.S. as the top world economy, so a drop in the U.S. credit rating further hints at a decline.
That erodes confidence. It makes people emotional, and investors are people just like everyone else.
