August 1, 2001

Japan's Woes Will Hit the US

Japan's economy is by far the weakest of the big three -- the US, Europe, and Japan. But there's a global slowdown spreading across the continents, and it will affect the US directly.

About 27% -- or more than one-quarter -- of all US Treasuries holdings outside the US are held by Japanese entities. On top of that, they own about $350 billion of marketable US corporate bonds and stocks. If struggling or failing Japanese banks are no longer able to hand out credit to Japanese companies in desperate need of cash infusions, the companies may be forced to dump their overseas and domestic investments -- stocks, bonds, real estate, business assets.

In addition to Japan's $329.7 billion in Treasury holdings, the UK holds $205.6 billion; Germany, $84.4 billion; OPEC, $53 billion; China, $51.6 billion; and Hong Kong, $45.5 billion. After decades of trade deficits, foreign corporations and individuals have accumulated the largest stockpile of US investments in history. But as their economies slow, the US may see that money disappear...

Plus, US corporations depend on foreign sales. Every one of the 30 companies in the Dow is multinational. They rely heavily on foreign revenues.

So as Asia and Europe struggle, we will see even bigger holes appear in US corporate earnings -- especially in the largest blue chips. Indeed, the bigger they are ... the greater their vulnerability to recession overseas!

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