Abe's plan to revive Japan's economy slams into reality
Amid the mass bond buying and a weaker yen, markets are doubting the pillars of 'Abenomics'
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In recent weeks, Haruhiko Kuroda has been the toast of the financial world, winning plaudits from Nobel laureates Paul Krugman and Joseph Stiglitz. The move by the Bank of Japan governor to end deflation with large bond purchases has been cheered by the International Monetary Fund's managing director, Christine Lagarde, the Asian Development Bank's president, Takehiko Nakao, and the Japanese business establishment.
Yet markets are raising troubling questions about Prime Minister Shinzo Abe's revival plans - dubbed "Abenomics" - of which Kuroda's bond-buying is a critical part. On Thursday, the Nikkei 225 Index plunged more than 5 per cent. The broader Topix lost 3.8 per cent, after a 6.9 per cent drop on May 23, its biggest one-day decline since the March 2011 tsunami and nuclear disaster. It's now down 11 per cent since May 22. That officially puts Japan in correction mode.
What's going on? Investors, who have driven the Nikkei up 30 per cent since the beginning of the year, are unnerved by bond yields that continue to gyrate despite the huge purchases by the bank. Kuroda has tried to calm fears, insisting that he sees no signs of "excessively bullish expectations" in the boom. But the markets are clearly reading his words as pro forma: what else is he going to say, that he suddenly has doubts about Abenomics?
Some of the sell-off represents simple profit-taking. Some reflects impatience. Investors no longer seem content to wait for Abe to reveal the most difficult part of his strategy - the politically controversial structural reforms that will be necessary to fully revive the Japanese economy. Although the prime minister had promised to lay out his plans this month, there has been talk that he might postpone the announcement until after July's elections for the upper house of the legislature, which his Liberal Democratic Party is expected to win handily. Delay is no longer an option: unless they see details soon, markets will probably remain volatile.
More worrisome for Japan's leaders, investors are also beginning to question the other pillars of Abenomics - Kuroda's bond-buying, and a yen that has dropped 20 per cent in value since November.