The Bank of Japan (BOJ) recently reported that they would continue to enhance monetary base at an annual pace of over 80 trillion yen and maintain their negative 0.1% of interest rate given the tough market conditions. Moreover, Bank of Japan assured that they would further decrease the interest rates if needed. But BOJ is implementing a zero rate to money reserve funds (MRFs). On the other hand, the bank issued a weak outlook for Japan, raising concerns over the country’s ability to recover its economy as Bank of Japan’s is already implementing aggressive Quantitative and Qualitative Monetary Easing (QQE) program to revamp the economic growth in the country. In fact, the bank reported that they would buy Japan real estate investment trusts (J-REITs) to enhance their outstanding amount at an annual pace of 90 billion yen. Bank of Japan pushed its interest rates into negative territory in the month of January, signaling that the Japanese economy has been struggling to generate growth. The central bank intends to achieve the price stability of 2% and is willing to implement the required measures accordingly.
 

Japan relative bank equities (Source: Thomson Reuters)
 
Few days back, Japan even reported weak numbers wherein its economy witnessed a decline of 0.3% during the fourth quarter of 2015 (October to December 2015) but better than its earlier forecasts of 0.4% contraction. Domestic demand fell by 0.4% while private consumption declined by 0.9% during the period. Private residential investment decreased by 1.2% but private non-residential investment improved by 1.5%. Public investments contraction reached to 3.4% during the quarter which has surpassed the expected forecasts of a negative 2.7%. Japan’s economy being a major exporter, witnessed a fall by 0.8% of exports in the fourth quarter (slightly better than the initial estimates of 0.9%). Imports also continued to fall during the period by a higher rate of 1.4%.
 

Consumer Price Inflation (Source: Thomson Reuters)
 
To tackle the current scenario, the government reported that they might further delay the much debated sales tax hike that is scheduled for next year given the tough market conditions in Japan, but some analysts believe that this might not be a favorable step by the government. On the other side, the country’s business fixed investment and domestic demand is generating a moderate rise. Employment and income situation in Japan has been stable while the housing investments are picking up.

The Japanese Nikkei 225 (INDEXNIKKEI: NI225) has been facing pressure since the starting of 2016, given the challenging economic condition in the country coupled with Bank of Japan’s decisions impact. As a result, the index reported a decline of around 15.29% (as of April 04, 2016) during this year to date. The aforementioned factors including BOJ’s negative interest rates coupled with Japan’s GDP growth concerns have contributed to the Index decline. Japanese Yen to US Dollar (JPYUSD) strengthened by 7.86% during this year to date (as of April 01, 2016). This solid performance of Yen is raising more concerns over the profit margins of Japanese companies which are into goods and services exports.
 

NI225 Chart (Source: Thomson Reuters)
 
We also note that a recent central bank survey (“tankan” survey for March) has indicated that BOJ’s initiative to drive up inflation expectations with monetary easing has not been a great success in terms of lifting stock prices or averting the ongoing rise in the yen. The survey has specifically reflected weakening of business sentiments among Japan’s big manufacturers to the lowest in last three years. Such a dip in business sentiment comes at the back of the slowdown in emerging economies (including China). The hazy global outlook has led big firms to plan for cutting capital expenditure by 0.9% for FY2016 from year-before levels. BOJ is thus expected to consider easing policy further. Then, BOJ’s data also depicted that the average lending rate for the balance of loans made by domestic banks was found to be at 1.098% in February which is a record low for a fourth straight month. The recent contraction in January-March would lead Japan to witness two straight quarters of negative growth which is not a healthy sign. It is also said that BOJ is expected to cut its consumer inflation forecasts at its rate review in the month of April 2016.
 

Tankan Summary for supply and demand conditions (Source: BOJ)
 
To give some respite in the above direction, there are news updates that the Japanese Prime Minister Shinzo Abe has set a target to double the number of foreign visitors and the amount of money they spend in the country by 2020 in order to support the sinking economy and raise gross domestic product to 600 trillion yen. This is expected to entail further relaxation of visa requirements and improving flight access. There was a further indication to achieve 60 million visitors and 15 trillion yen in tourist spending by 2030. Japan also plans to discuss monetary policy and structural reforms at the May 26/27 summit in an attempt to strengthen its own policies to lift the economy.


Given the entire scenario, initiatives from the BOJ and the government would be crucial to watch for in the near term.

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