The recent succession of sharp drops in U.S. share prices has induced an intensifying downtrend in the stock markets of other countries, including Japan.

A certain adjustment in the U.S. market would come as no surprise because of the mounting sense of overheating since last year.

Business conditions in the country remain brisk, and recent reports show that U.S. wages are increasing fast. These trends triggered a rise in long-term interest rates, and stock prices fell in response to that development.

In the United States, the unemployment rate has fallen and commodity prices have kept rising. Taking into account those economic trends, the U.S. Federal Reserve Board has said it wants to gradually raise the key interest rate. A limited drop in stock prices could be seen as a process of adapting to the current climate.

The question lies in the degree of imbalance accumulated in the market when everything was premised on low interest rates.

An excessive spread of investment practices that presupposed rising stock prices and stable market conditions could induce a vicious cycle of fall after fall once market trends start turning in the other direction.

The ramifications could be more far-reaching if the downturn were to affect the managerial health of financial institutions.

There is a pressing need to determine how much a surge in interest rates would affect non-stock assets and corporate business plans.

Another source of concern lies in the economic policy of U.S. President Donald Trump.

Even as commodity prices keep rising and employment is believed to be near capacity, Trump is still seeking to cut taxes and increase expenditures.

Concerns about growing budget deficits are putting upward pressure on interest rates. A policy management that is incongruous with economic conditions could, in fact, end up hurting the soundness of the economy.

Japan also must brace for a big impact.

A ripple effect between the financial markets of different countries is not the only matter of concern. In real economy, too, many Japanese businesses rely on their offshore operations, including in the United States, for a large part of their earnings.

It is therefore necessary to monitor future developments, including trends in foreign exchange rates.

If Japanese companies grow more cautious about raising wages out of concerns over market trends, that would end up chilling domestic demand and protracting their reliance on overseas operations.

They should steadily raise their wage levels.

On the policy front, Tokyo is not totally in step with Washington. Japan still adheres to an easy money policy, while the United States has been raising its key interest rate.

That said, Tokyo is taking an unusual monetary policy of pegging long-term interest rates at near-zero levels, which means that bigger “strains” could be released if Japan enters a phase of interest rate hikes.

The Bank of Japan should thoroughly prepare, and provide ample explanations on, an exit path that would help prevent an excessive shock to the economy.

The current situation in the United States points to the risk that growing fiscal deficits may strengthen upward pressure on interest rates once Japan shifts to an exit policy.

While Japan should strive to keep economic conditions stable, it should also never forget about mid- to long-term perspectives on fiscal health.

--The Asahi Shimbun, Feb. 10