IEEJ：January 2015ｃ○ IEEJ 2015

Special Bulletin

A Japanese Perspective on the International Energy Landscape (201)January 7, 2015

Turbulence Hit World Economy as New Year OpenedKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan

Turbulence hit the world economy as the year 2015 opened. After rising to an all-time closing
high of $18,054 on December 26 on the strength of the brisk U.S. economy, the Dow Jones
Industrial Average on the New York Stock Exchange entered a downward trend upon the turn of theyear and plunged to $17,372 on January 6, inducing a global stock market decline. On the Tokyo
Stock Exchange, the 225-issue Nikkei Stock Average slipped below the psychologically importantlevel of Yen 17,000 to Yen 16,883 on January 6, losing 525 points or 3% from the previous day.

The stock market decline came as both Japanese and U.S. markets were expected to rise thisyear. Among factors behind the unexpected stock drop are (1) rapid crude oil price falls and (2)concerns over the future European economy, including fears of the resurging Greek debt crisis,indicating growing risks involving the whole of the world economy. The growing risks prompted
market participants to take risk-averse actions to shift from risky assets to safer assets including
bonds, creating stock and crude oil price drops as a synergetic effect.

The rapid crude oil price drops cited above as a factor behind the global stock market plunge
included the benchmark West Texas Intermediate futures price's slip below $50 per barrel meeting
earlier expectations. The price fell below the level briefly on January 5 and dropped to $47.93 on thenext day's close. The price, which had been expected to decline below $50 late last year, actually didso, prompting market players to pay attention to how far the price would decrease.

Crude oil price drops are expected to benefit the world economy on a net basis. But rapid,
substantial falls are feared to seriously affect oil producing countries with vulnerable economies
depending heavily on oil revenues, spilling credit risks over to the whole of the world economy.

In a typical case, concerns have grown over a Russian financial crisis. Late last year, theRussian ruble's plunge was coupled with a Russian stock market drop and a capital outflow fromRussia. As crude oil prices have declined below $50 and are expected to fall further, market players

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IEEJ：January 2015ｃ
○ IEEJ 2015

have grown concerned that the Russian economic problems could become serious and trigger credit
and monetary fears that could spread to the world economy including the European market. There
are other countries with structurally vulnerable economies, including Venezuela, Nigeria and otheroil producing countries in severe economic conditions, as well as Indonesia, Brazil, Turkey and otheremerging countries affected by "Russia-selling" last month. In this way, crude oil price drops haveinduced credit and monetary risks and led to risk-averse selling of stocks, becoming a factor to shakethe world economy.

The second factor, the European economic problem including fears of the resurging Greek debt
crisis, is unignorable. The serious Greek economic problem triggered the euro crisis in late 2009 andhad been contained thanks to rescue plans by the European Union and the International Monetary
Fund, and Greece’s austere budget policy. On December 29, however, the Greek parliament wasdissolved due to its failure to elect a president, with a snap election scheduled for January 25. The
problem is that a radical leftist party with populist policies of abandoning the austere budget andrefusing to repay debt is dominantly expected to win in the coming election. If the expectation
comes true, Greece is feared to enter economic turmoil, default on debt repayment, see bank runs
and secede from the eurozone in the worst scenario.

While Greece attracts attention as the weakest link with the Greek crisis and fears of its
secession from the eurozone resurging, market players are looking to other eurozone countries invulnerable economic conditions and under strong populist influences. As Greece's secession from theeurozone is expected by some people to have a far greater impact than the Lehman Shock, theEuropean market turmoil has emerged as a major destabilizing factor for the world economy since
December 29.

In July 2012, European Central Bank Governor Mario Draghi vowed to do anything to defend
the euro, contributing to restoring market stability. The European economy, though remaining
stagnant and weak, kept from plunging into any crisis, with the Greek situation remaining in a lull.
In the meantime, however, discontent with the austere budget policy might have accumulated withpopulist forces growing in Greece, leading to the parliamentary election. The development has
exposed serious economic and political problems plaguing the European economy anew.

The two grave events of crude oil price drops and Greek crisis fears thus shook the world
economy at the outset of 2015. The turbulent opening of the year has made future developmentseven more uncertain.
Contact: report@tky.ieej.or.jp
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