Market turbulence poses first test for Abenomics

Bond market stability ‘extremely desirable’

TOKYO: This week’s turbulence in Tokyo markets exposes a key risk of Prime Minister Shinzo Abe’s all-in strategy to revive Japan’s economy - if investor confidence falters, the government and the Bank of Japan may be left with few options to turn the tide. Yesterday, the Nikkei share average had another tumultuous session, traversing a 7.1 percent range between positive and negative territory before ending up 0.9 percent. The violent moves kept investors on edge after a 7.3-percent slide on Thursday, the sharpest drop for the Japanese stock market since the 2011 earthquake and tsunami. At the same time, the 10-year-bond yield, a key interest rate linked to home mortgages and business loans, has almost tripled from the 0.315 percent record low it plumbed in early April just after the central bank announced its plans for a massive increase in asset purchases.

The wild market gyrations represent the first serious test for Abe, who has become a popular figure at home and on Wall Street for pro-growth policies featuring massive monetary easing, a big burst of government spending and a promised “growth strategy” centred on deregulation and trade liberalisation.

Another issue is the danger of the debilitating sideeffects on asset markets stemming from the eventual rollback of the US Federal Reserve’s massive stimulus - external risks that Tokyo could do little to overcome. In fact, Thursday’s Nikkei rout was triggered by weak factory activity data in China, Japan’s second-biggest export market, and on concerns sparked by Fed chief Ben Bernanke’s suggestion that its bond-buying could be tapered this year.

Most analysts and many overseas investors seemed ready to write off the Nikkei’s tumble as an inevitable wave of profit-taking. The average has only slipped back to its levels as of early May and remains up nearly 70 percent since mid-November when it became clear Abe was likely to be become premier and implement his reflationary policies. “It’s just a speed bump, in my view,” said New Yorkbased fund manager Audrey Kaplan at the $656 million Federated InterContinental Fund who has increased the Japan weighting in her fund to 20 percent from 15 percent at end-March. “The economic conditions in Japan are substantially better than they were a few months ago. That will support the market.”

But one challenge for Abe and his hand-picked BOJ chief, Haruhiko Kuroda, is that the positive wave of investor and consumer sentiment has run far ahead of sustainable gains in the world’s third-largest economy in key measures such as income or corporate spending, analysts say.

‘The market effect’

Consumption has picked up and exports have stabilised on Abenomics, especially the unprecedented easing by the BOJ, which has vowed to end 15 years of entrenched deflation and tepid growth by doubling the supply of money to generate 2 percent inflation over the coming two years. Supporters of Abenomics say it’s the best chance Japan has of escaping the liquidity trap as changing perceptions will create a virtuous circle of consumption, bigger company profits, investment and higher wages that ultimately revitalizes growth.

In his first response to the market turbulence, Kuroda, largely unruffled, told a seminar that bond market stability “is extremely desirable.” The BOJ chief also struck an optimistic stance on the bank’s policies. “What’s most important is that the effect (of our monetary easing) creates a positive cycle of production, income and expenditure in the economy, leading to a gradual rise in prices. That’s our hope and something that’s achievable. We’re in the process of this taking shape,” Kuroda said.

The yen is down more than 20 percent against the dollar and interest rates have remained relatively low, cheering investors and Japanese exporters. Japan’s seven automakers, one of the main beneficiaries of the weaker yen, have outlined plans to increase capital spending by almost 15 percent this financial year on a global basis but those plans will take time to play out.