Japanese stocks, bonds and exchange rate have lost momentum over the past weeks, a sign that the effect of its monetary and fiscal stimulus, or part of the so-called “Abenomics,” may be letting up.

Japan’s Nikkei225 falling more than 7 percent on May 23 was a wake up call to investors and financial policymakers as the benchmark continued its decline toward 13,700 from 15,000 over the last six trading days.

Yields on Japan’s state bonds touched 1 percent, while their value has dropped, increasing the debt burden of the world’s third largest economy.

The yen, which saw its fastest devaluation of about 25 percent over the last six months, gained, with the exchange rate trying to stay afloat above the threshold of 100 yen to the U.S. dollar. The rate’s 52 week high was 103 yen.

Japan’s sovereign risk on 5-year bonds measured by credit default swap premium rose 1.29 basis points to 78.38bp last Friday, compared to 53.26bp on May 13.

As Abenomics seemingly saw its effectiveness wane, Korea’s benchmark KOSPI index passed the 2,000 mark, while its currency weakened to about 1,130 won to the dollar.

Analysts, however, said it was too early to say whether two of the three arrows of Abenomics had started to lose effectiveness, and whether this latest development would be positive for the Korean economy.

A chief economist at JPMorgan Securities Japan projected that the risk of Abenomics is lurking in the shadows.

“Abe’s goal to reach 2 percent inflation over the next two years is deemed impossible, but its easing policy is desirable only when given more time,” economist Massaki Kanno said in a conference on Abenomics in Seoul last week.

“Time is what’s important. We need at least 5 or 10 years to fully see the effects of Abenomics,” he added.

Japan has been promoting “three arrows” in its policy for economic revival from more than 20 years of stagnant growth: government spending, monetary easing and fiscal reforms.

Its fiscal and monetary stimulus programs have been simultaneously working together with Japan’s central bank printing and pumping money into the market where it allows the government to maintain its deficit spending.

This is in line with efforts to boost exports through currency debasement, and overcome deflation, and achieve a 2 percent inflation, aimed at boosting private spending.

Although Japan has denied claims of currency manipulation, an easy money policy tends to devalue currencies, which in turn helps exports at the expense of making its trading partners lose competitiveness, and increase expectations of a rise in consumer prices.

Inflation may have caused the value of Japanese bonds to fall, and their yields to climb, analysts said.

The third arrow refers to fiscal reforms the Japanese government seeks to carry out in the latter half of this year such as through tax adjustments that can help reduce its debt, while private spending gets back on track on the back of inflation expectations.

“While the Bank of Japan is buying time, the government should propose radical changes in structural policies, especially in the services sector,” Kanno of JP Morgan Securities said.

Given the global market integration and connection, Japan’s current situation is not so positive for the Korean market, which could face increased volatility in capital-flows. Japanese capital that had been borrowed on low interest rates for higher-yielding investments including in Korean assets will need to be redeemed to stave off further possible market downturn.

Bank of Korea Gov. Kim Joong-soo had previously warned that financial markets in Asia ― Korea and emerging markets ― could go through more cyclical ups and downs following the Japanese equity benchmark’s May 23 nosedive as global monetary easing could be set to unwind in the near future.

By Park Hyong-ki and Suk Gee-hyun
(hkp@heraldcorp.com) (monicasuk@heraldcorp.com)