Japan set for more stimulus

Expect the Bank of Japan to cut interest rates again and increase its monthly government bond purchases.

Japan's Nikkei 225 indexhas slipped by 10% sincethe start of the year. Thestrengthening yen it isa traditional haven forinvestors during marketturmoil threatens toundermine the earnings ofthe index's exporters.

Other data don't lookespecially encouragingeither. GDP shrankmarginally in the firstquarter and remainssluggish. The labourmarket is still tight, but consumption seemsunlikely to grow muchin the near future. Thisspring's annual round of wage negotiations looksset to result in smaller payhikes than in 2015.

The Bank of Japan's keycore inflation measure(inflation minus fresh foodand energy) may weakenfrom its current annualrate of 0.9%. Expect the Bank to cut interest ratesagain and increase itsmonthly government bondpurchases, says CapitalEconomics. Yet morecentral-bank action implies a weaker yen andhigher stocks, as wehave often pointed out. In conjunction with gradualstructural reforms, suchas making Japan Inc moreshareholder-friendly, andreasonable valuations, itmeans that Japan remains a buy.

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