Japan’s Nikkei 225 index has slipped by 10% since the start of the year. The strengthening yen – it is a traditional haven for investors during market turmoil – threatens to undermine the earnings of the index’s exporters.
Other data don’t look especially encouraging either. GDP shrank marginally in the first quarter and remains sluggish. The labour market is still tight, but consumption seems unlikely to grow much in the near future. This spring’s annual round of wage negotiations looks set to result in smaller pay hikes than in 2015.
The Bank of Japan’s key core inflation measure (inflation minus fresh food and energy) may weaken from its current annual rate of 0.9%. Expect the Bank to cut interest rates again and increase its monthly government bond purchases, says Capital Economics. Yet more central-bank action implies a weaker yen and higher stocks, as we have often pointed out. In conjunction with gradual structural reforms, such as making Japan Inc more shareholder-friendly, and reasonable valuations, it means that Japan remains a buy.