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Japan economy worries over loss of confidence
Aggregated Source: Shanghai Daily: Business

JAPAN'S financial markets gyrated wildly yesterday, underscoring the vulnerability of its economy to a loss of investor confidence as Prime Minister Shinzo Abe attempts shock monetary easing to end two decades of stagnation.

Interest rates, or yields, on 10-year Japanese government bonds briefly topped 1 percent for the first time in a year yesterday, following news that some US Federal Reserve officials are willing to scale back the American central bank's stimulus efforts as soon as June if the economy perks up.

The spike, which came despite the Bank of Japan's aggressive efforts to keep borrowing costs down, is unnerving investors at a time when Japan's overburdened government finances are vulnerable to rises in interest rates. A sustained rise would raise the cost of borrowing for the government.

"Japan really has a long-term debt problem," said Franklin Allen, a professor at the Wharton School at the University of Pennsylvania. "There will be a financial stability problem" if long-term government bond yields rise to 2.5 percent to 3 percent, he said.

The bond gyrations, along with fresh data showing China's recovery is faltering, led to a 7.3 percent tumble in the benchmark Nikkei 225 stock index, as investors cashed in on recent sharp gains. The Nikkei lost 1,143 to 14,483.98, its worst drop since the March 2011 tsunami disaster.

The BOJ has been grappling with unexpected swings in the government bond market since early April, when its new governor, Haruhiko Kuroda, announced a drastic shift in policy aimed at doubling the amount of cash circulating in Japan's economy. That move should in theory stop yields from rising. The BOJ's goal is to meet a 2 percent inflation target within two years, the main tenet of Abe's economic program, dubbed "Abenomics."

Since taking office in December, Abe has raised government spending and promised reforms to make the world's No. 3 economy more competitive.

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Copyright Shanghai Daily: Business