Japanese Prime Minister Shinzo Abe’s electroshock economic stimulus therapy (known as “Abenomics”) seems to be having a mixed effect on his country’s sluggish economy: Japan’s Nikkei 225 index has taken a serious beating while its currency (the yen) has strengthened slightly against the U.S. dollar.

“Japan’s Nikkei fell 6.4 percent to close at 12,445.38, a drop of 21 percent from its high in May,” the Associated Press reports. “When an index falls by more than 20 percent from a high, it is commonly defined as a bear market.”

“Japanese media reports said overseas hedge funds may be dumping the country’s equities after the Bank of Japan’s decision earlier in the week to refrain from additional monetary easing measures,” the report adds.

Yes, Japan’s main stock index is now in bearish territory.

“The Japanese market is down 20.4 percent since May 22. It’s still up 44.9 percent over the past year,” the report adds.

Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar

From the AP:

Juichi Wako, equity market strategist at Nomura Securities Co. in Tokyo, said the drop on the Nikkei was due to a reversal of the money flow that had flooded Japan in recent months, partly on inflated hopes for “Abenomics,” as Prime Minister Shinzo Abe’s fiscal and monetary policies have been dubbed.

In April, the Bank of Japan announced a massive stimulus in an attempt to encourage economic growth and get inflation up to 2 percent. The euphoria drove the Nikkei up to five-year highs before enthusiasm waned.

Excitement is now ebbing, Wako said, and the yen is strengthening — a headwind for Japanese exporters.

The yen and the U.S. dollar have been having a back-and-forth battle for some time now. However, this battle in recent months has favored the dollar:

Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar

The yen compared to the dollar (year-to-date).

Still, the yen is at its highest point since Japan unleashed its aggressive stimulus policies.

And despite the slump in Japanese stocks, decent economic news seems to have calmed U.S. markets a bit:

Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar
Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar
Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar Japanese Stocks Enter Bear Territory, Yen Strengthens Against U.S. Dollar

FINAL THOUGHT: The recent movements in Japan’s markets and currency could point to three things.

First, if the Nikkei continues to tumble deeper into bear territory, it may serve as a scathing indictment on economic stimulus polices.

Second, though European and U.S. markets have steadied since the Nikkei’s six percent-plus plunge, the Japanese tumble sent a ripple effect through global markets, further proof that we are all in a rather precarious situation.

Lastly, even as Japanese stocks fall, its currency strengthens against the dollar – something the country’s officials, who have been putting artificial pressure on the yen, may not welcome.

Will a strengthening yen lead to more artificial devaluation? And will that lead to a possible escalation in what many fear will be a currency war?

Follow Becket Adams (@BecketAdams) on Twitter

Featured image AP photos.