Message from Tokyo: Look Out Below!

Whenever a major stock market falls by more than seven per cent in a single trading session, as the Japan’s did on Thursday, there’s a frantic search for culprits: program trading gone awry, stricken hedge funds unloading their positions, a sudden shift in government policy, weakness in the currency markets—over the years, we’ve heard them all. Often, though, there is no plausible explanation that can be pointed to, except for the fact that prices had been rising rapidly and the market was “due” for a correction.

Same thing in this instance. In Japan, the big story for months has been Prime Minister Shinzo Abe’s effort to get the economy going again after twenty years of stagnation, but in the past few days there hadn’t been much new to report. “Abenomics,” which involves a big dose of fiscal and, especially, monetary stimulus, appears to be working. The stock market is up, the Yen is down, and the economy is expanding. That’s exactly how Abenomics was supposed to work. It’s good for Japan, and, as I pointed out in a recent column, it’s good for the rest of us. But we knew all that last week, when the cover of the Economist featured a picture of Abe flying like Superman. So why the mini-crash?

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