Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder No.507

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Reflecting back on the past year, 2008 was truly a period during which the dark clouds of pessimism spread around the world. Stock prices at the start of 2009, an indicator widely used to foretell the coming year, rose in spite of a jobless rate of 7.2%, a retreat in consumption and other negative news. In New York the Dow-Jones average climbed over $9,000 line, while in Tokyo the Nikkei stock average cleared ￥9,000, The incoming administration of President Barack Obama has already been on the move to advance employment expansion policies and stimulate private demand with the equivalent of ￥82 trillion in tax cuts, large-scale public investment and other steps aimed at pulling America out of a recession that has already dragged on for more than a year.

Yet, share prices that rose from the beginning of the year in anticipation of the economic stimulus package being readied by the Obama team suddenly plunged from the second to the third week of the year. The New York Dow looked like it might fall through the $8,000 level, while the Nikkei average followed suit by dipping below ￥8,000 at one point. These movements suggest that a mix of hope and uncertainty concerning the 44th U.S. President and his platform currently characterizes the market. When hopes push up prices for a sustained period of time, the economic fundamentals indicating worsening recession push them back down. During the first two weeks of the year, New York stocks fluctuated by around $1,000, while the Nikkei moved up and down within a range of some ￥1,000.

These developments are grounded in factors outside of the immediate economic realm. Obama’s economic stimulus policies target expansion of job opportunities as the top goal, with a hearty scale of public investment to be carried out toward that end. Essentially, this is a declaration of the unbending resolve to not let up on stimulus measures until such time that the recession has been brought under control and the economy is on the road to recovery. The market’s response to this stance, however, has been harsh, and has tended to be impacted by “reality over words.” To move both consumer psychology and the market in the right direction, another and different dose of reality is required.

Although this may sound self-serving, I have continued to repeat my forecast that war would break out in the Middle East in 2009.

Like a prelude to such a conflict, since late December fierce battles have been raging between the Israeli army and the armed forces of Hamas, the Iranian-backed Palestinian paramilitary organization and political party that currently dominates the Gaza Strip on Israel’s border with Palestine. The current clash is characterized by Israeli’s determination to expand the ground warfare phase of the onslaught until Hamas military forces totally withdraw from Gaza. As such, it appears to be a departure from the type of retaliatory tit-for-tat fighting that has marked the standoffs between the Israeli and Palestinian sides to date.

International opinion demands that Israeli suspend the hostilities, while President Obama is also in a situation that makes it impossible to fully support the Israelis in this latest cause. Then again, Obama also made the following comment last summer while visiting Israel as a U.S. presidential candidate: “If somebody was sending rockets into my house where my two daughters sleep at night, I would do everything to stop that, and would expect Israel to do the same thing.” In this context, therefore, Obama can be expected to take firm action in the event that “daughter Israel” were seriously threatened or attacked.

With the end of the administration of President George W. Bush, the political power of the United States has dipped to its lowest point since the end of World War II. Along with this, the U.S. economy, heavily dependent on outside capital for its health, now finds itself deeply mired in recession amidst the exodus of such overseas money from its borders. Under the current stagnant environment, in which Washington cannot possibly raise interest rates, it will be impossible to attract international funds with foreign exchange policies. Besides this, there is also no epoch-making new industry on the immediate horizon (such as the information technology sector in the past) capable of acting as a magnet for overseas funds. Through the process of elimination, therefore, the only remaining factor really capable of drawing capital to the United States is “war.”

If President Obama adds the “reality of war” to his standard salvo of “words and numbers,” I believe that the U.S. economic recovery would soon grow relentless.