Impact of Nikkei’s Crash on the U.S. Stock Markets

January 21st, 2006 Leave a comment Go to comments

Back in the mid 1990’s a U.S. hedge fund no main stream American had ever heard of caused a dramatic meltdown in the U.S. stock market. Long-Term Capital Management (LTCM) lost billions of dollars by investing in highly speculative investment positions. In the early 1990’s spectacular investment returns lead nearly major bank to willing invest its money into LTCM’s portfolio. LTCM’s failure threatened to pull down nearly the entire international banking system including banking giants such as Merrill Lynch and J.P. Morgan. Over the course of several weeks the U.S. markets lost approximately a quarter of their value before the Federal Reserve successfully orchestrated a bailout of LTCM.

This past week Japan’s markets suffered a similar fate when allegations were raised about improper accounting at Livedoor. Livedoor is a Japanese Internet firm that up until a week ago had nearly a $2 billion market cap. News of Livedoor’s troubles caused investors to go into a panic that forced Japanese security regulators to halt trading prior to Wednesday’s close to prevent a meltdown of one of the world’s most important markets. At the peak of the crisis, the Nikkei 225 was down 1400 points or 8.5% from its peak thus far into 2006. Such a dramatic fall in a short time frame raises concerns whether selling pressures could rattle world markets.

The sell-off occurring within Japan’s financial markets is markedly different from the situation involving LTCM. Livedoor’s problems appear to be an isolated incident that will not impact global economic conditions. The Nikkei 225 has had a strong run-up over the past year. Despite the substantial losses last week, the Japanese markets appear to be among the world’s strongest at this time.

  1. No comments yet.

Please copy the string plRVz7 to the field below: