(Mainichi: August 25, 2015 – p. 1)
Japan’s steady economic recovery may get derailed if global equity prices drop and the yen’s rise continues. The recent market tumble cannot be ignored, as the government led by Prime Minister Shinzo Abe has relied on stock price gains to maintain its influence. Calls could grow for the government to take steps to stimulate the economy. Meanwhile, the Bank of Japan may come under pressure to loosen monetary policy further, as it remains bullish about the prospects for the Japanese economy.
The Abe government has maintained it three-pronged economic program backed by drastic monetary easing, fiscal spending and a growth strategy. Corporate earnings have reached a record level, and annual spring labor-management talks this year saw wages increase for the second straight year. Income gains were lifting consumption and production, which was expected to create a virtuous economic cycle. Though the country’s preliminary gross domestic product shrank 0.4% on the quarter in April-June and hit negative territory for the first time in three quarters, the government stressed “the contraction was caused by a one-off factor.”
But this optimistic scenario is beginning to fade. China’s economic slowdown could dampen China-bound exports and impact Japanese corporate earnings: The yen’s rise could become a headwind. Poor corporate earnings could limit wage increases. Consumer sentiment could be seriously affected by the drop in stock prices. All of these may shake the foundations of the Abenomics scenario.
Calls for economic stimulus are growing stronger. Liberal Democratic Party Secretary-General Sadakazu Tanigaki noted on August 18: “It is necessary to come up with far-sighted economic measures.”
The Bank of Japan, meanwhile, forecast the Japanese economy will grow 1.7% in fiscal 2015. Governor Haruhiko Kuroda said at a press conference on August 7: “The Chinese government has been introducing a series of stimulus measures and there is more room for policy adoption. Its economy is expected to grow at a pace of around 7% this year and next year as well.”
But the scenario that the Japan’s economic recovery is predicated on the Chinese economy regaining steam is unraveling. The view is spreading among investors that “the BOJ may be pressured to ease monetary policy further if stock prices remain low.”