This week’s slide in Japanese stocks raises the stakes for Prime Minister Shinzo Abe’s planned revamp of business regulations as officials sought to sustain confidence in efforts to revive the economy.
The Topix Index (TPX) of shares yesterday tumbled 3.8 percent, a week after careening down 6.9 percent, the most since the March 2011 earthquake and tsunami. The index’s gains over the past six months were pared to 45 percent, from as much as about 63 percent earlier this month.
The waning in the rally coincides with a jump in government bond yields as central bankers attempt to stoke inflation in a nation with 15 years of entrenched consumer-price declines. With the Bank of Japan already committed to doubling the monetary base in two years, the next step to justify expectations for an economic rebound is a reform package from Abe that unleashes business investment, according to analyst Hideo Kumano.
“There have been overblown expectations for the BOJ’s monetary policy -- sentiment is waning and that’s being reflected in stock-price moves,” said Kumano, executive chief economist at Dai-ichi Life Research Institute Inc. in Tokyo and a former BOJ official. “What the government can do to boost stock prices is steadily implement its growth strategy. There are no other remedies.”
Japan’s equity market, best-performing major bourse this year, entered a correction when the Topix closed at 1,134.42, the lowest level since April 19 and down 11 percent from the five-year high reached on May 22. A correction is defined as a decline of more than 10 percent from a recent peak. The gauge was up 1.5 percent as of 9:12 a.m. today.
“It’s natural that stocks will move randomly,” Abe adviser Koichi Hamada told reporters in Tokyo yesterday. “Excessive upward or downward moves can happen any time.”
Economy Minister Akira Amari, who last week said there was “no need to be perturbed” by the May 23 tumble in stocks, yesterday said that the government’s growth strategy is the most important of its three-pronged approach to reflating the economy. He said he’s not concerned by the stock turbulence.
Along with monetary and fiscal stimulus, Abe, 58, plans a structural reform package to be unveiled next month. Amari told reporters yesterday that policy makers will achieve economic recovery through boosting businesses’ capital spending. The recipe of Abenomics started propelling equities in November, weeks before Abe’s party swept to victory in national elections, installing him as prime minister for the second time.
“The pace of Abenomics is crucial -- as investors see the Japanese economy recover, equities will start to rise again, even with normalizing bond yields,” Morgan Stanley MUFG Securities Co. economists led by Robert Feldman in Tokyo wrote in a report to clients this week. “The longer it takes for Abenomics to succeed, the longer markets will languish.”
Abe said yesterday that consumption and corporate profits are improving.
Yields on benchmark 10-year government bonds closed at about 0.89 percent, up from 0.56 percent four weeks ago and 0.455 percent on April 4, the day that Bank of Japan Governor Haruhiko Kuroda unveiled his plan to achieve 2 percent inflation in two years. Consumer prices, excluding fresh food, fell 0.4 percent in April from a year before, a government report showed today.
A rapid rise in yields can affect the economy and people’s livelihoods, and the central bank will deal with the increase appropriately, Amari said.
The central bank yesterday increased the frequency of its monthly asset purchases after bond-market participants told officials that changes were needed in the wake of increased volatility. The BOJ said in a statement that it will buy government debt about eight to 10 times a month starting in June, compared with about eight times now.
Officials have been maintaining close dialogue with the market, and the BOJ has been carefully monitoring the situation, Deputy Governor Hiroshi Nakaso said in Tokyo yesterday. Nakaso said that he doesn’t expect a surge in yields.
Success with fiscal stimulus and structural reform, the other arrows in the Abenomics quiver, will help the BOJ meet its inflation target, Nakaso said.
Abe said May 17 that he aims to get annual private investment back to 70 trillion yen ($695 billion), the level before the depths of the 2008 financial crisis, through deregulation, taxes, spending, and equipment-leasing deals. The figure was an annualized 65.15 trillion yen in the first three months of 2013, down for a fifth straight quarter.
The prime minister also last week outlined a target of tripling infrastructure exports to about 30 trillion yen by 2020. Abe has said he will reveal his full growth plan ahead of the Group of Eight summit in Northern Ireland on June 17-18.
Outlines of the third-arrow initiatives encompass plans from boosting the participation of youth and women in the workforce to making it easier for new businesses to start up and joining the Trans-Pacific Partnership trade talks.
“The policies could include measures that contribute to structural changes, such as the appointment of independent directors,” Naoki Kamiyama, an equity strategist at Bank of America Merrill Lynch, wrote in a report this week. Kamiyama said the focus on economic reform is likely to continue after elections to the upper house of parliament in July, which offer Abe’s ruling coalition the opportunity of securing a majority in both chambers of the Diet.
Business investment has yet to join exports and consumer spending in aiding GDP growth, which accelerated to a 3.5 percent annualized pace in January-to-March, the fastest in a year. Steelmakers are starting to see the impact of Abenomics as demand rises, Hiroshi Tomono, chairman of the Japan Iron and Steel Federation and president of Nippon Steel & Sumitomo Metal Corp., said today in Tokyo.
“We are going to formulate a growth strategy as a third arrow that will expand private corporate investment and consumption in order to stimulate Japan’s 500-trillion-yen economy and make it grow,” Amari said in a speech today. “This is the core of Abenomics.”
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