A few weeks ago, I wrote why Abenomics must succeed
. At the time, nearly everyone got caught up in the euphoria and was lauding the new prime minister of Japan for his success. Only a few weeks later, many are starting to call it a failure.
What happened? The Japanese stock market, after jumping 75 percent in the past few months, is down over 20 percent since May 23, and the yen has shot up in value, which is causing concern among some supporters of Abenomics. Japan has been trying to push down the price of the yen to help boost exports.
Why has the market crashed so spectacularly? That is the million dollar question. No one knows for sure, but the answer appears to have little to do with Japan itself. Many have blamed weak economic data outside of China, and others have said Japanese investors were taking profits. Still some said it was a hedge fund selling, etc. However, very few theories have to do with domestic Japanese economy or the policies of Prime Minister Shinzo Abe.
Whether the economic policies of the new prime minister will succeed or not is a totally different issue, which is beyond the scope of this article. However, it is too early to judge the success or failure of the policies.
So why does this all matter?
When I wrote Abenomics must prevail, I spoke about how important Japan is in the global economy. Now that there is great uncertainty in Japan over the rate of the yen, the price of Japanese government bonds and stock prices, failure is almost guaranteed.
Take for example Toyota. For every drop of 1 yen to the dollar, the company earns an extra 40 billion yen (or $420 million). When Abe was elected, $1 was equal to 85 yen. As of May 23, $1 was trading at over 103 yen — and within less than a month 95 yen equal a dollar.
This means that within a few months, without lifting a finger, Toyota made close to $8 billion and lost close to $3.5 billion in less than a month. To put this in perspective, Toyota earned $13 billion in all of 2012.
How can a company plan anything with its profits and losses changing by billions of dollars every few weeks? This is not only a problem for Japanese companies, but rather for any company doing business with Japan.
This is where the media comes in. They like to hype stories and focus on exciting news in a herd type of mentality. When Japanese stocks are hot all the pundits yell buy, and when they tank the pundits scream doomsday. Trying to hype something will never make it succeed in the long run.
However, if the media (and the general public) makes it seem that Japanese policy has failed (or is even uncertain), the economy cannot be healthy. The vicious circle could ensure a very quick defeat of Abenomics unless sentiment changes very quickly. For the sake of the world economy, I sure hope it does.
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