The Nikkei 225 has pulled back approximately 11.1% year-to-date after the world’s third largest economy seen its benchmark index gain more than 56.7% last year. Closing at 14,477 yesterday (26 March), the Nikkei 225 is now trading below its 200-day moving average of 14,513, indicating weakness in the index.
 
Macquarie Equities Research (MER) has issued a report on the Japanese economy on 25 March. Here are some excerpts from the report.
 
The proactive monetary reflation policy introduced by the Bank of Japan (BOJ) in April 2013 has successfully delivered a highly competitive exchange rate and resulted in negative real 10-year interest rates. Next, the private sector will respond to these signals. Export growth and an asset inflation/wealth effect are the two principal channels to watch.
 
The pace of the private sector response is partially a function of confidence, and here the loss of the government’s consistent, persistent media campaign against entrenched deflationary expectations is a disappointment. The most important example was detailed in the 11 March 2014 Monetary policy alert: No 2015 details announced yet. MER regards the latter as a monetary policy mistake, and has trimmed their GDP and consumption forecasts as a result.
 
MER’s 2014, 2015 and 2016 real GDP growth forecasts are 1.6%, 1.3% and 0.8% respectively (reflecting 0.2% cuts to 2014 & 2015). MER’s CPI, interest rate and exchange rate forecasts remain unchanged. Japan’s negative output gap is forecast to close in the 2H of 2015. 2016 is expected to be a relatively normal year.
 
This year, investors need to care about quarterly real GDP growth: In line with what MER believes to be common sense, and historical experience, MER has a strong 1Q 2014, a negative reaction in the 2Q 2014, and then modest 2H 2014 growth. In seasonally adjusted annual growth terms the 3Q of 0.8% (0.2% times four) is probably just enough for the government to confirm in November the implementation of the October 2015 consumption tax rate increase. Nonetheless, MER expects the government to approve another public works heavy supplementary budget.

Source: Macquarie Research - 27 Mar 2014