Nikkei's 6% decline triggers falls on other Asian bourses and European markets but nerves later steadied by US jobs figures
A plunge in shares in Tokyo prompted jitters in the world's emerging markets yesterday as investors expressed fresh concern about the Japanese government's recovery plan and the possible phasing out of America's stimulus programme.
Japan's leading stock market index, the Nikkei, fell by more than 6%, extending the fall in recent weeks to more than 20%, the official definition of a bear market.
The decline – accompanied by a rise in the Japanese yen on the foreign exchanges – triggered falls on other Asian bourses and led to early falls on European markets. But nerves were later steadied by stronger than expected jobs and retail sales figures from the US and the FTSE 100 in London ended the day five points higher at 6304.
Economic reforms announced by the Japanese prime minister Shinzo Abe late last year prompted a hefty rise in share prices and a fall in the value of the yen. But in recent weeks, markets have started to voice doubts about the ability of Tokyo to use a bond-buying programme and fiscal expansion to lift the country out of deflation.
Thursday's uneasy mood was not helped when the World Bank revised down its forecasts for global growth this year from 2.4% to 2.2%. Markets are now waiting to see whether next week's meeting of the Federal Reserve will provide clues as to when America's central bank might start to slacken the pace of its quantitative easing programme.
Julian Jessop, chief global analyst at Capital Economics, said: "Only a few weeks ago, the complaint was that the spill-over of liquidity from the advanced economies threatened to destabilise markets in the developing world. Now it seems as if the one thing worse than more QE is less QE. More seriously, emerging market equities have again demonstrated how hard it is for them to decouple from developed markets, particularly during a wider sell-off."
Meanwhile, Portugal's deep recession and rising political tensions risk undermining the country's bailout programme, despite a fresh easing of its deficit targets, according to the International Monetary Fund.
In its latest progress report on Portugal, the IMF confirmed that it has agreed Lisbon's tough deficit reduction goals should be loosened – by 1 percentage point in 2013, and 1.5 percentage points in 2014 – as the economy slows.
"In view of the significant deterioration in the macro-fiscal outlook, there was agreement that the fiscal deficit path under the programme needed to be recalibrated," the IMF's report said.
Portugal's debt-to-GDP ratio is now expected to peak at 124% next year, two percentage points higher than at the IMF's last review earlier this year.
That decision has been seen as part of a gradual shift away from doctrinaire austerity within the "troika" – the coalition of the IMF, the European Commission and the European Central Bank that has overseen eurozone bailouts.
But despite the more accommodating stance towards rescued governments, Portugal's deficit targets remain tough, and the IMF is concerned that the public could reject the austerity measures being demanded of their government.
"The hitherto sturdy social and political consensus that has buttressed strong programme implementation has weakened significantly," it warned.
The IMF stressed that the outlook for Portugal's economy remains "sombre". The economy contracted by 3.25% last year, and it is now expected to shrink again, by 2.25%, this year, partly driven by the slowdown across the rest of the euro area.
"Strong export growth, which has hitherto helped offset the contraction in domestic demand, has of late started to decrease reflecting weakening demand from the rest of the euro area".
It added that unemployment, which is already at 18%, is likely to continue rising until at least 2014. Portugal will receive the next tranche of its bailout, worth €657m, as a result of the IMF's review.