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The problem with Japan's high-stakes economic mind game The problem with Japan's high-stakes economic mind game
(4 months later)
The Nikkei 225, Japan's primary stock market, plunged by over 7% on Thursday, from 15,942 (the highest it's been in over five years) to 14,483. That's a precipitous fall; but it takes on a rather different character when you look at it in the context of the last five months, since the Liberal Democratic party's Shinzo Abe became prime minister. Even including yesterday's fall, the Nikkei is still up almost 45%; its rally has until now been one of the most bankable things in finance.The Nikkei 225, Japan's primary stock market, plunged by over 7% on Thursday, from 15,942 (the highest it's been in over five years) to 14,483. That's a precipitous fall; but it takes on a rather different character when you look at it in the context of the last five months, since the Liberal Democratic party's Shinzo Abe became prime minister. Even including yesterday's fall, the Nikkei is still up almost 45%; its rally has until now been one of the most bankable things in finance.
The reason for this extraordinary surge seems to lie with the sweeping economic reforms implemented by Abe, in an attempt to beat the problems plaguing the country for a decade and a half. It's come to be known as the country's "lost decade", and while the accuracy of that phrase is long gone, it conveys the lack of hope that many feel. Nearly every conventional economic measure that can be implemented has been, and yet still the country experiences low levels of growth, rarely higher than 2% a year in the boom times, and averaging -0.7% a year since the recession.The reason for this extraordinary surge seems to lie with the sweeping economic reforms implemented by Abe, in an attempt to beat the problems plaguing the country for a decade and a half. It's come to be known as the country's "lost decade", and while the accuracy of that phrase is long gone, it conveys the lack of hope that many feel. Nearly every conventional economic measure that can be implemented has been, and yet still the country experiences low levels of growth, rarely higher than 2% a year in the boom times, and averaging -0.7% a year since the recession.
Whether it's a cause or a symptom of Japan's problems remains debatable, but the failure of the country's monetary authorities to beat deflation – the phenomenon of average prices falling – has led to understandable anger. And so Abe, who stood for election with an explicit promise beat it once and for all, has one of the strongest mandates ever to follow unconventional economic policies.Whether it's a cause or a symptom of Japan's problems remains debatable, but the failure of the country's monetary authorities to beat deflation – the phenomenon of average prices falling – has led to understandable anger. And so Abe, who stood for election with an explicit promise beat it once and for all, has one of the strongest mandates ever to follow unconventional economic policies.
Since then, he's launched a £70bn stimulus package and enacted a quasi-nationalisation of the country's industrial stock (with plans for the state to build new factories and lease them to manufacturers), in order to boost investment in the country; he's appointed a maverick new governor of the Bank of Japan, Haruhiko Kuroda, who has begun a "qualitative and quantitative easing" programme worth nearly £2tn, in order to return inflation to its target rate of 2% in the next two years; and, perhaps most novel of all, his economic and fiscal policy minister, Akira Amari, announced an explicit target for the stock market, telling reporters that, "It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31)", according to the Japan Times.Since then, he's launched a £70bn stimulus package and enacted a quasi-nationalisation of the country's industrial stock (with plans for the state to build new factories and lease them to manufacturers), in order to boost investment in the country; he's appointed a maverick new governor of the Bank of Japan, Haruhiko Kuroda, who has begun a "qualitative and quantitative easing" programme worth nearly £2tn, in order to return inflation to its target rate of 2% in the next two years; and, perhaps most novel of all, his economic and fiscal policy minister, Akira Amari, announced an explicit target for the stock market, telling reporters that, "It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31)", according to the Japan Times.
In the end, the Nikkei missed that target, not breaking 13,000 till a week into April. But even that was an astonishing rise, of 17% in less than two months; and it's crucial to the success of Abe's policy, which has come to be called Abenomics, because it's all about management of expectations.In the end, the Nikkei missed that target, not breaking 13,000 till a week into April. But even that was an astonishing rise, of 17% in less than two months; and it's crucial to the success of Abe's policy, which has come to be called Abenomics, because it's all about management of expectations.
If people do not expect inflation, then businesses don't raise prices, employees don't negotiate for pay increases, and, sure enough, inflation doesn't happen. It's a vicious cycle, which needs something to step in from outside and kick it into a new groove; and all this talk of unlimited easing, and doing "whatever it takes", to end deflation, could be enough. But it is, fundamentally, a high-stakes mind game.If people do not expect inflation, then businesses don't raise prices, employees don't negotiate for pay increases, and, sure enough, inflation doesn't happen. It's a vicious cycle, which needs something to step in from outside and kick it into a new groove; and all this talk of unlimited easing, and doing "whatever it takes", to end deflation, could be enough. But it is, fundamentally, a high-stakes mind game.
Which brings us back to the Nikkei plunge. Because the problem with mind games is that if everyone realises that they're playing them at once, the effect can evaporate. And that is what traders, fitfully waiting for the market to reopen, will have been worrying about on Thursday night. Is it just a blip, a bear trap, in an otherwise ongoing rise? Or is it Japan collectively losing its hope?Which brings us back to the Nikkei plunge. Because the problem with mind games is that if everyone realises that they're playing them at once, the effect can evaporate. And that is what traders, fitfully waiting for the market to reopen, will have been worrying about on Thursday night. Is it just a blip, a bear trap, in an otherwise ongoing rise? Or is it Japan collectively losing its hope?
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