A stunning stock market plunge in Tokyo and unexpected volatility in the bond market have sparked fears that “Abenomics,” the Japanese government’s much-vaunted strategy to breathe life into the long-ailing economy, may already be coming unglued.
The main thrust of Prime Minister Shinzo Abe’s plan is to instill confidence in Japanese consumers and businesses – and end more than a decade of crippling deflation – through aggressive monetary and fiscal stimulus: a massive increase in bond purchases, coupled with increased government spending; productivity-boosting structural economic reforms including deregulation of energy and other key markets; and an eventual doubling of consumption taxes that will bolster the national budget, and create fiscal room for corporate tax cuts.
Since November – the month before Mr. Abe’s sweeping electoral victory – Abenomics has sparked a remarkable surge in equities, boosted corporate profits through a lower yen, and triggered increased consumer spending, an early indication of success where so many other Japanese governments have stumbled. But now that success has been called into question.
The sudden dive in Japanese markets Thursday threatens to undo the wealth gains that have reinvigorated consumer and business confidence.“The fact that it was such a big one-day move is shocking,” said Benjamin Reitzes, senior economist with BMO Nesbitt Burns Inc. in Toronto. “But unless we see consistent declines, I am not all that concerned. I wouldn’t say that this is the end of Abenomics. It’s too early for that.”
The headlines unsettling Japanese markets came from outside the country. Markets around the world were roiled Thursday by worries the U.S. Federal Reserve might soon take its foot off the gas pedal and by weaker-than-expected manufacturing data from China. But none was hit harder than Tokyo. While U.S. markets quickly rebounded, the benchmark Nikkei 225 stock index nosedived 7.3 per cent, the worst one-day drop for Japanese equities since March, 2011, in the wake of a disastrous earthquake and tsunami. At one point during the trading day, the selloff approached 10 per cent.
On Friday, the Nikkei share average rose in turbulent trade, but the extreme volatility and worries that Japan’s bull-run may be running out of steam sidelined many investors.
The Nikkei rose 0.9 per cent to end at 14,612.45 after dropping as much as 3.5 per cent to 13,981.52 in the afternoon. In morning trade, it rose as high as 15,007.50, as investors picked up some beaten-down stocks after the huge on Thursday.
For the week, it dropped 3.5 per cent, the biggest weekly decline since October.
The equity market “is still up close to 70 per cent since November. So I don’t think you can conclude from that that Abenomics is failing,” said Julian Jessop, chief global economist with Capital Economics in London.
Mr. Jessop also dismissed concerns that the bond market gyrations over the past two weeks could disrupt aggressive easing efforts by the Bank of Japan, another key plank in the recovery plan, along with a ¥10-trillion ($101-billion) stimulus package and structural reforms to boost domestic competition and encourage business investment.
The yield on 10-year Japanese government bonds briefly climbed above 1 per cent, the highest level in a year, before falling back slightly to 0.9 per cent. That’s a far cry from the record low of 0.315 per cent in early April, after the Bank of Japan unveiled a bold plan to double the monetary base by quadrupling its purchases of Japanese government bonds and buying other assets.
“I’m relatively sanguine about it, as is the Bank of Japan,” Mr. Jessop said. The spike in bond yields “is essentially just a correction of a previous undershoot. They’re basically back to where they started the year, but still pretty low. To the extent there was anything fundamental behind the rise in yields, it’s actually a sign of success. People were expecting the economy to pick up, for inflation to return. All that is consistent with higher long-term interest rates.”
Indeed, the Japanese economy grew by an unexpectedly strong 3.5 per cent annualized in the latest quarter, fuelled by a rise in consumer spending and export gains stemming from a weaker yen, another part of the Abenomics strategy.
Still, Abenomics is not without serious risks that could yet drive the world’s third-largest economy back off the rails. To assuage the Bank of Japan and the international community, which have pressed the government to get its disastrous fiscal house in better order, Abenomics includes a plan to double consumption taxes over the next two years. Such a hike, which would enable the government to finance other parts of its agenda, such as lower corporate taxes, could easily choke off a consumer-led recovery.
The consumption-tax hike amounts to “a major fiscal tightening, which will be a big hurdle for the economy to clear,” Mr. Jessop said. But the government is already hedging its bets, noting that the first increase, scheduled for next April, will depend on the economy’s progress in the second quarter.
Still to come is the thorny political problem of those promised structural reforms to remove labour-market impediments, to open large swaths of the economy to genuine competition and to reduce costs.
“Successive attempts to reform the economy have failed,” Mr. Jessop said. “I suspect the chances of success are stronger this time around, because there is greater co-ordination between the government, the central bank and, hopefully, the corporate sector as well. But it’s certainly not guaranteed.”