Financial markets may put more pressure on Prime Minister Shinzo Abe to revive Japan’s economy, after his disappointing growth plan pushed stocks to a two-month low and the yen higher, a former Bank of Japan official said.
“For now it’s just a yellow card but it’s possible there will be a red card and stocks will decline more,” Hideo Hayakawa, 58, a former BOJ executive director who oversaw the financial system until March. “His failure to announce a solid growth strategy triggered these market reactions and the question is whether he will properly acknowledge this fact,” Hayakawa, who is now a senior executive fellow at Fujitsu Research Institute, said in an interview in Tokyo on June 7.
Abe on June 5 outlined his economic growth strategy, the third of three arrows along with monetary and fiscal stimulus in his Abenomics policies aimed at ending 15 years of deflation in the world’s third-biggest economy. An absence of steps to free up the labor market and a delay in implementation invited disappointment from investors, triggering a decline in stocks and a rise in the yen.
After next month’s election, Abe must focus on the economy and supporting businesses through deregulation or the stock market could continue to decline, Hayakawa said. The government needs to win the vote before it can consider labor market reform, ruling party lawmaker and Abe ally Kozo Yamamoto said in an interview last week.
The government will work on a second round of growth measures in autumn, Abe said yesterday on a NHK television program, with bold tax cuts for capital investment and reduction in regulations.
An unprecedented monetary easing under Bank of Japan Governor Haruhiko Kuroda and increased government spending have helped bolster consumer confidence and wages.
The economy grew 4.1 percent in the first quarter a second reading of data showed today, as the government revised up capital investment and the contribution of private inventories.
The Topix index was up 4 percent today at 12:50 p.m in Tokyo after dropping almost 7 percent last week, the third week of falls. The index is up almost 28 percent this year, having fallen 14 percent from its May 22 high, its strongest level since August 2008.
The yen was at 98.12 per dollar after touching 94.99 last week, the strongest in two months.
“The currency will fall and shares will rise” as long as the BOJ’s easing is implemented, said Yamamoto, as this increases the money supply. The current foreign exchange markets movements are a “temporary adjustment,” he said.
“Recent market developments make it clear that the key for Abenomics is not Kuroda but Abe,” said Hayakawa. Abe has gained popularity because of his promises to boost the world’s third-largest economy and he should use this political capital wisely, Hayakawa said, as it takes power to tackle labor market deregulation and other reforms.
Kuroda is holding a two-day policy meeting starting today, at which the nine board members may discuss steps to calm volatility in the bond market, people familiar with the matter told Bloomberg News.
“The BOJ is gambling on massive easing so it shouldn’t be swayed by recent volatility in the bond market. Yields around 0.8 percent or 0.9 percent are totally fine,” said Hayakawa. “It’s still low as not so many people believe the BOJ will hit the target but once they do, yields will go higher.”
The benchmark 10-year bond yield was at 0.84 percent at 1:07 p.m. in Tokyo.
Kuroda pledged in April to double the money supply in the economy to achieve 2 percent inflation, with a time horizon of two years. Hayakawa, who was also chief BOJ economist until 2007, said he hasn’t seen “any sign at all” that the bank can meet the goal.
Only one of 40 economists expects Kuroda can meet a 2 percent price target in two years, according to a survey by the Japan Center for Economic Research released last week. Consumer prices will rise 1 percent in the fiscal year starting April 2015, according to the average estimate of the economists surveyed in the report.
Before Abenomics, Abe was known for backing the revision of Article 9 of the Japanese constitution, the basis of Japan’s postwar pacifism.
“The biggest concern among investors is if Abe will use his political popularity to revise the constitution after the election” in July, Hayakawa said. If that becomes reality, investors will think they “must escape as quickly as possible” from Japanese markets.