The stock market in Japan has entered some turbulence after capturing the world’s attention with the dramatic rise since last November. The mood in Japan until recently has been that of optimism and a sense of long-waited recovery from the twenty-year recession. Now, many in Japan began to voice their concerns and the beginning of the end. So how should we assess the situation?
Three factors need to be considered to properly assess the turbulence of Japanese market. First, the surge of market value was incited by a sense of regime change in Japanese politics. The fact that the Liberal Democratic Party won the general election in last December (as well as the expectation of their victory even from November) communicated to the world and to the market that new and more vibrant economic policies would be implemented upon the rule of the LDP. The stock market steadily rose after the election.
Since LDP leader Shinzo Abe, over and over, voiced his aggressive economic policy and strong stance vis-à-vis the Bank of Japan regarding the inflation target and quantitative easing, it was inevitable the value of the Japanese market would rise. So the recent turbulence can be interpreted as settling down to the new regime and letting the bubbles that do not match the actual economic vibrancy shrink a bit.
Second, many short-term investors and hedge funds dropped a good sum of capital to ride the wave upward. The Nikkei continue to rise until mid May. Many heavyweight investors seem to have sold by early May and harvested the quickly ripened fruit of their investments. This short-term investment caused the quick rise of the market value and, once again, the quick sink in late May to early June.
Nikkei 255 has been ebbing and flowing around 12,500 yen after hitting 15,627 yen at one point. At the same time, it is important to remember that before November the market stayed around 8,000 yen. In spite of the departure of the short-time investors, the Bank of Japan’s continual effort of quantitative easing along with devalued yen (though it is likely to stay around 94-95 yen per US dollar, unlike 120 yen), the export industry should continue to be strengthened. While the speed of the market growth will not be as fast and drastic as before, it should continue to rise given the fact that there will be no significant slow down of economy in the US, as well as in China.
The third factor contributing to the market turbulence is Prime Minister Abe and the Japanese government’s inability to communicate to the world that they are serious about the structural reform to spur the economy. On Friday, June 14th, the cabinet officially announced the third arrow of Abenomics (first was the aggressive monetary policy and second, efficient financial policy) regarding the growth strategy. Many specialists analyzed the strategy and concluded that it would not boost the economy as loudly promoted by the LDP and Japanese government.
The newly announced strategy has not lowered the already high corporate tax (as much as 38%, while China is 25% and South Korea is 24.2%). This does not communicate to the world that the administration is serious about becoming globally competitive. Other aspects were also a disappointment for industries and investors.
The last factor is the most serious one of all. If the government does not aggressively move forward to deregulate ever-growing and industry-killing regulations, Japan will not be able to survive in the global market. It requires a serious retuning of the current system, which entails pain and challenges to various sectors of the economy. But without the substantial change to the system, the Japanese economy will not grow steadily and upwardly.
So the bottom-line: Will the stock market in Japan recover its luster and attractiveness of earlier this year? Though the growth will be substantial, it will certainly be slow. It will not draw the world’s attention as it has in the last six months. Outside of external challenges to the economic growth, such as the drastic slowing down of Chinese or American market, is there any internal challenge? The Prime Minster and his cabinet must be serious about the actual growth strategy and especially regarding deregulation of the government. Otherwise, it would be a slow recovery from the twenty-year recession.