But it is now clear that the IT revolution has engendered a worldwide bubble in share prices. The IT firms doing well in Japan, moreover, are reliant on exports and could easily stumble depending on overseas demand. The notion that the financial crisis had come to an end, meanwhile, was discredited with the bankruptcy of the Sogo department store chain. Massive bad debts continue to hang over the economy, and Prime Minister Yoshiro Mori appears to be taking a policy course that could break the framework for financial stabilization. The banks are beginning to sell their shareholdings, and foreign investors, aware of lingering instabilities in the financial system, are also selling.
Individual investors burned by the bubble, moreover, are in no position to make new investments.
If falling share prices lead to a vicious circle of restraint in plant and equipment investment and personal consumption, Japan could well slide back into a recession. Share prices may fall to as low as 12,800 in the first half of next year. Prices are determined by the money supply and demand. The BOJ has the tools to determine the money supply, but when the nominal interest rate is near zero, such tools become ineffective, and there is no telling whether prices are going to rise or fall. As a result, people's expectations become muddled, and deflation creeps in.