Unbelievable Market Enthusiasm

Thirsty for an evidence of revitalization in economy, markets seem to be too excited every day. The enthusiasm is based on expectation to the positive attitude of PM Shinzo Abe for economic recovery. Actual concept of “Abenomics,” however, is the mixture of targeted inflation and public construction projects with additional national bonds. There came some skepticism up among economists.

Abe’s closest economic adviser, Koichi Hamada, a professor of Yale University, showed his view that “there will be no concern about JPY 90 to 100 against 1 dollar, even though 110 should be worried,” at the press conference in Tokyo. Responding to it, JPY fell to 90 against 1 USD, the lowest in last two years and seven months, in Tokyo Foreign Exchange Market on Friday. Nikkei 225 rallied to ¥10,900, the highest in last two years and nine months, expecting good deal for exporters.

Some economists feel current market excessive. “Stock market is surprised with current hike and foreign exchange went to an unbelievable level, while bond market is relatively cool,” described a dealer of a bank in Japan. JPY is marking isolated down in international market, which invites criticisms from competitors against Japan and even International Monetary Fund.

Credibility of Abenomics is still not assured. PM Abe insists on that the Bank of Japan needs to unequivocally announce 2% inflation target. But we don’t know how the inflated amount of money works. His policy expects ¥200 trillion for public construction next ten years. But it is concerned that the money for construction will not be fully digested within every fiscal year. It also is said that the effectiveness of focusing on building infrastructure is known to be limited from the experience after bubble economy ended early 1990s, and excessive support from the government discourages motivation of industries for innovation or exploring new market.

Assessments by think tanks on the governmental Emergency Economic Measures, delivered on January 11^th are not fully positive. The report of Mizuho Research Institute on January 16^th expects that the measures may raise real GDP in FY 2013 by 0.6%, while 1.1% should be expected as a whole. The main reason of slowness in FY 2013 was lack of supply reserve in public investment sectors. “Steady execution of growth policy and review of strategy for fiscal steering are needed for mid-term boost of growth power and incentive for getting rid of deflation,” the report concludes.

What we see in current market enthusiasm and economic policy of Abe administration is only a short-term optimism. If Abenomics does not contribute for raising job rates and individual income level, the expectation of markets may show steep down.