The Wall Street Journal reports: "the sharp drop in Japanese stocks underscores a vulnerability of the "Abenomics" recovery: Weakness in overseas economies may undermine the success of measures to jump-start growth at home".
"Economies are all connected, and we're really worried about how far the impact will reach" from the recent emerging-market turbulence, Toyoaki Nakamura, chief financial officer of Hitachi Ltd. , said Tuesday, even as the electronics giant raised its earnings forecast for the fiscal year ending next month, predicting a record profit.
Much of the boom engineered by Prime Minister Shinzo Abe in 2013 was driven by a big expansion in monetary stimulus from his handpicked Bank of Japan governor, which pushed down the value of the yen against the dollar and other major currencies. That gave the country's manufacturers a lift in global markets by lowering the relative price of their goods. It also helped bring about higher profits and a stock market rally, which in turn boosted domestic spending.
"But one month into the new year, Japan's stock market and the yen are moving in the On Tuesday, the yen rose to its highest level in more than two months versus the dollar, with investors viewing the Japanese currency as a safe investment at times of economic turbulence, casting a new shadow over exports. With the yen strengthening and worries spreading about growth abroad, the Nikkei Stock Average dropped sharply; it's down 14% so far this year".
"The market reversal and signs of fragility in overseas demand pose challenges to Japan's economy, which is just about to become more dependent on exports and the weak currency for growth. In April this year, the government plans to raise the national sales tax by three percentage
points to 8%, a move expected to sap strength off consumption given lackluster growth in wages.
"The Japanese public has until now supported economic reforms because of rising stock prices and the falling yen," which have worked favorably for the nation's economy, said Ryutaro Kono, chief Japan economist at BNP Paribas.
But structural overhauls—such as loosening rigid labor rules and reducing red tape—have made little progress. And with the market now turning unstable, "it could become politically more challenging" to carry out such reforms, which often involve painful changes,Mr Kono said".
