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The stock market and real estate situation in the U.S. is mirrored in Japan. However, prices in the Japanese stock and real estate markets have risen to levels utterly disconnected from any conventional measure of fundamental value. This suggests that once they begin to fall, as is now happening, they may have a long, long way to go on the downside.[Footnote]

This is worrisome not only from the standpoint of the Japanese economy but also for its consequences for the U.S. Japan has been a major exporter of capital in the last decade--reinvesting its trade surpluses and providing liquidity by purchasing debt in the U.S. A collapse in the Japanese market could cause this source of capital to dry up as it is diverted to domestic Japanese needs, and this could accelerate the problems in the U.S.

Editor: John Walker