How can the Japanese stock market crash affect the U.S. market?

After one of its worst-performing days in decades, the Japanese stock market bounced back, with the Nikkei 225 rising 10.23 percent above Monday’s closing position.

This is good news for Wall Street, as the performance of Japanese markets and a concerning July jobs report had sent investors into a selling spree, with worries growing that the US could be headed for a recession. Though Japan’s Nikkei 225 shows that the market is still down compared to its position six months ago, it remains in the green relative to where it was in August 2023.

A major economic collapse in Japan seems far less likely after markets improved their position substantially on Tuesday, but in the case of an economic downturn in Japan, what would be the impact on the United States?

In a globalized world, the economies of many countries are tied together through dozens of factors, including trade, foreign direct investment, and tourism. Japan has seen its currency, the Yen, weaken against the dollar in recent years. Those who have visited Japan in the last year may have benefited from the stronger dollar, being able to spend less while away because the US currency went a lot further. For investors, there is a similar story. Investors could bring in their foreign currencies and purchase stocks in Japanese countries at discounted rates relative to what they could purchase in their own countries. However, the Bank of Japan, the country’s central bank, announced last week that it would raise interest rates to improve its position against the dollar. This sent investors who had put their money in Japanese markets packing, as they sold off many of their positions, sending the market down overall.

Trade between the US and Japan

As the market stabilizes to these new conditions, we will consider the impacts of an economic downturn in Japan and what it would mean for the US economy. One critical piece of information to keep in mind is that part of the downturn seen in Japanese markets on Monday was fear that there could be an economic slowdown in the United States or, even worse, a recession.

The US is Japan’s second-largest trading partner, and if Japanese products become more expensive in US markets, suppliers may begin to look elsewhere. As the Yen has weakened against the dollar, exports to the US have grown. Additionally, if the US does land in a recession, consumption could drop, and Japan could see the revenue from trade fall. This could weaken the Japanese economy even further if they cannot find new export markets.

Regardless of which side encounters a downturn, there would likely be a subsequent fall in the number of tourists who would travel to each country would fall. In 2018, 3.5 million tourists from the US visited Japan, and in a recession this number would drop as people look to save money over fears that they could lose their jobs.