Here's What The Heck Is Happening In Japan

The Japan market crash has finally broke through to the mainstream.

Last night and this morning, several non-finance folks have been asking “What the heck is happening in Japan?”

First, from an obvious market standpoint, it’s crashing.

Japan’s main stock index, the Nikkei, fell 6.25% last night, to 12445. Just a few weeks ago it was right around 16,000.

That’s a crash.

Of course, Japan had been one of the hottest markets in the world, surging like crazy since last autumn.

Here’s a chart, via FinViz, of Nikkei futures going back several months.

FinVizThe big runup that started in November coincided with the emergence of “Abenomics”, the big economic strategy outlined by new Prime Minister Shinzo Abe, who supports eliminating the Japanese slump via a three-arrow combination of ultra-aggressive monetary policy, fiscal policy, and structural reforms.

The monetary policy has been the easiest to implement because all it took was for the BOJ to just declare an aggressive inflation target and a lot of QE. The fiscal and structural parts are much more difficult.

But for the purposes of rising asset prices, the monetary stimulus has deserves a lot of the credit for the big Nikkei surge.

So what’s gone wrong?

Basically, people are doubting the Bank of Japan’s resolve.

Matt Yglesias has a great post at Slate showing that the collapse of the Nikkei also corresponds with a recent decline in inflation expectations, and those declines in inflation expectations associate with hints that the Bank of Japan is not fully committed to stoking more inflation.

SlateOne of the arrows refers to comments from the Finance Minister concerning the rise in Japanese Bond Yields, which hinted that maybe the Bank of Japan was getting freaked out. And the other arrow concerns minutes from a Bank of Japan meeting, in which concern was expressed over rising yields, which also caused investors to question the bank’s resolve.

The bottom line is this: For a central bank to do its thing it needs to be aggressive and clear in its goals, and not worry about the bumps along the road.

Paul Volcker was willing to crash the US economy (well at least create a recession) in order to beat inflation. Ben Bernanke gets called a traitor by US Presidential candidates, but is committed to his extraordinary monetary policy actions.

The Bank of Japan already looks nervous. And the market is starting to bet against it.

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