Bank of Japan’s ‘hands tied’ ahead of policy meeting

Government policy should provide a tailwind to Japanese equities. With the 2% inflation target for the Japanese economy now far out of reach, the Bank of Japan (BoJ) may find its hand forced to implement additional measures at this week’s monetary policy meeting.

In an attempt to boost consumption and counter the falling birthrate, the Japanese government will formulate its ‘Plan to Realise the Dynamic Engagement of All Citizens’ and announce a ¥10trn economic package in May ahead of the G7 Summit meeting. This has only fueled speculation that the consumption tax hike will be postponed because of its contradiction with other current policies.

Negative rates are beginning to show results and company costs have declined. Last year, total M&A transactions in Japan amounted to ¥11trn and share buybacks exceeded ¥5trn. Under the current environment, we expect to see an increased flow of funds into M&A activity and share buybacks, exceeding last year’s numbers*.

However, important political and economic events from the end of April to June, including the BoJ policy meeting, the G7 Ise-Shima summit and FOMC, could serve to increase the expectation of additional political measures both in the US and Japan, setting market sentiment onto another course.

* According to the BoJ’s Flow of Funds Accounts released on March 25th, total cash and deposit balance of Japanese corporations hit a record ¥246trn at the end of December 2015.

Katsunori Kitakura is lead strategist at SuMi TRUST, Japan’s largest asset manager

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