World Simultaneous Slump

Tokyo Stock Market marked significant fall with concern on world simultaneous slump stemming from decline of Chinese economy. Nikkei Average dropped by ¥895 from last weekend, which was the biggest fall in these 27 months, and value of yen rose up to ¥116 against U.S. dollar, bringing uncertainty on exporters like Toyota or Nippon Steel & Sumitomo Metal. The downfall revealed vulnerability of China-dependent Japanese economy with skepticism of viability of economic policy led by Prime Minister Shinzo Abe dubbed as Abenomics.

The final price of Nikkei on Monday was ¥18,540.68 as a result of consecutive drop for five days. The steep downfall reflected slump in Shanghai Stock Exchange Composite Index, which broke a defense line of 3500 points on Monday. Newspapers in Japan reported temporary big drop of Dow Jones Industrial Average by $1,000. Chain reaction seemed to have no end.

The source of the negative response to world stock market exists in China. After devaluation of Renminbi following downfall in Chinese stock market, fundamental concern on Chinese economy suddenly spread to investors. Purchase of China has been supporting Japanese economy, encouraging business of exporters or retailers. However, with concern on Chinese slump, investors began to move to Japanese yen as haven for their money. As its consequence, rise of Japanese yen undermined competitiveness of Japanese industry.

Exporters have been a major driving force for Abenomics. Historical accomplishment of Japanese business entities has been based on cheap value of Japanese yen and rally in stock market. Companies started raising salary for workers, accepting insistent request of Abe. If this positive circulation of business is broken down, scenario of Abenomics will be seriously damaged.

Bank of Japan expected 1.7% of growth in FY2015. “Chinese government is delivering various economic policies and still has options in their policy choices. Growth with around 7% will continue there this and next year,” told Governor of the bank, Haruhiko Kuroda, earlier this month. Now, such optimism was diminished.

As always, political leaders start to appeal the necessity of “economic measures” with fiscal mobilization this fall. But, discussion in the Diet is focused on security legislation, leaving no time for economic policy. Basically, this may not a matter that can be solved through domestic economic policies. What the Japanese have to recognize would be that Abenomics was not a positive phenomenon led by economic policy, but preferable fortune driven by world economy.