EPA Says Dow Jones Average Overvalued By 36.1%
Friday, November 26, 1999
TOKYO (Nikkei)--The Dow Jones Industrial Average for April-June 1999 was 36.1% higher than the level it should be, according to a model used by Japan's Economic Planning Agency (EPA) in a report on world economies issued Friday.
The stock price index was 28.3% higher than a theoretical level just before the Black Monday plunge on the U.S. market in October 1987, which led to worldwide stock market declines, the report says.
The latest EPA white paper says the U.S. economy is vulnerable in four areas -- comparatively high stock prices, a declining household savings ratio, an expanding current account deficit, and increasing inflationary fears.
The white paper argues that U.S. stock prices have remained high because stock market correction has been delayed due to the strong confidence placed in U.S. monetary authorities. If stock prices plunge, consumption levels will decline in line with reduced financial asset values, to a level where the current U.S. household savings ratio, which is already low, could possibly not be maintained.
An expanded current account deficit will depreciate the dollar and reduce the inflow of foreign funds, which may strengthen protectionist trends in the U.S., the white paper says.
It also said inflationary worries are intensifying due to a tight supply-demand balance in the labor market, rebounding crude oil prices and the weaker dollar. The business expansion in the U.S. may stop if U.S. monetary authorities are forced to adopt a tight money policy, the paper said.
If a correction in the U.S. stock market occurs simultaneously with a rise in U.S. consumer prices, the EPA warns the U.S. economy may head toward a "hard landing," because U.S. authorities will find it difficult to relax credit, the paper says.
(The Nihon Keizai Shimbun Friday evening edition)
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