Abenomics has for a time changed market expectations, but realities may have finally caught up. Since Shinzo Abe was elected prime minister late last year, the Japanese stock market had gone on a tear. But it has retreated since last month and may have entered bear territory. Meanwhile, the yen, which has been declining rapidly to the cheers of Japanese exporters, has reversed course and become a bullish bet among some currency traders. Abe has had more than six months of honeymoon. Now, though his popularity still hovers above an impressive 70 per cent, he will face a harder time ahead.
Market players have been taking profits following the euphoria over Abenomics. More serious may be doubts about the effectiveness of the economic programme. Abe started his premiership by convincing voters he had the right diagnosis and the right cure for their economy, which has been mired in deflation and slow growth for two decades.
He arm-twisted the Bank of Japan into an unprecedented monetary-easing programme modelled on the US Federal Reserve to tackle deflation. This has been the first and so far most effective of his three so-called arrows. To accelerate growth, he launched his second arrow of fiscal stimulus to encourage private demand. Rightly or wrongly, his government now claims credit for the economy's expansion at an annualised rate of 4.1 per cent between January and March, which was much higher than the initial estimate of 3.5 per cent.
But when he unleashed his third arrow - restructuring and reforming the domestic economy - early this month, markets reacted badly. The Japanese stock market slumped while the yen shot up. He has promised to promote private-sector investment; open up energy, health and infrastructure; double foreign investment; cut red tape; and expand the role of women in the economy. But he steered clear of more controversial topics such as corporate tax cuts, and liberalising the labour market and farming sector.
The third arrow is the most important but its goals are also hardest to achieve. Every prime minister in the last two decades had talked about the need to reform the economy, but each ran up against vested interests and entrenched bureaucracy. Abe's efforts seem the more substantial because it is backed by massive fiscal and monetary stimuli. He has promised more measures to reboot the economy after the July 21 upper house election in parliament. Let's hope he delivers this time.