By Anne D. Picker, International Economist,Econoday
Monday, July 22, 2002

Cranky investors pushed equities ever lower in volatile trading last week. Earnings were mixed but that didn't seem to matter. Distrust of corporate data is running deep as each day brings new scandals. Company officials now prefer to err on the conservative side, adding to investor headaches. The good news there is, and there's plenty of it, is being ignored. On the week all indexes followed here were down substantially, ranging from 1 percent for the Mexican Bolsa to 7.7 percent for the Dow Industrial Average. The negativism in financial markets has not yet affected consumer spending, but it has pressed down on sentiment in the United States and abroad. Italy, for example, registered its lowest consumer sentiment reading in over three years. Other economic data continues to be mixed as one would expect it to be at this point in the business cycle. The 'disconnect' between the real economy and the financial markets yawns wider and wider.

The Bank of Japan monetary policy committee voted unanimously to leave policy unchanged. The bank pared rates to close to zero 16 months ago and has made trillions of yen available to banks in an attempt to stem a five-year drop in lending and pull Japan out of recession. The Bank has said it will maintain its current policy until prices, excluding fresh food, stop falling from year-ago levels. By that measure, prices began falling in July 1998, leveled off between May and September 1999, and then resumed a slide that has run 32 months.

In their monthly review of the economy, the Bank of Japan said that the economy is moving closer to a recovery. The increase in exports and production should eventually boost domestic demand by boosting earnings. But the bank tempered its optimism, saying that the falling dollar and global stock slump pose risks for exporters and that falling wages and rising unemployment are slowing domestic consumer spending. A full-fledged recovery needs domestic demand, not just exports. The yen's 13 percent rise since the start of April (the new fiscal year in Japan) threatens company profit forecasts, which were based on the yen averaging about 126 to the dollar. On Friday the yen closed at ¥116. The Bank of Japan's view of the economy differs from that of the government, which is more optimistic. In its latest economic report, the government said the economy is in the first stages of a recovery as gains in exports and factory production should spread to other industries.

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