Yesterday, Japanese shares posted their biggest decline in three weeks as the Japanese Central Bank refrained from injecting extra stimulus into the economy. The Nikkei was an underperformer amongst regional indices, with its 1.4% drop versus the region which was unchanged.

The Bank of Japan (BoJ) announced yesterday that they were holding off monetary easing, citing optimism of the Japanese economy. This time last April was when the central bank first introduced its multi-billion-dollar asset purchase scheme, sparking a major rally in Japanese shares.
 
Bank of Japan holds off monetary easing
Yesterday afternoon, the BoJ announced that they were maintaining their expansion of the monetary base at a pace of 60 trillion yen to 70 trillion yen (US$681 billion) per year, on the back of a recovering Japanese economy, "albeit with some fluctuations due to the
consumption tax hike,"

While this decision was in line with street consensus, most are also expecting some form of stimulus to come at some point to counter an expected slowdown in consumer spending as a result of the sales levy increase on 1 April to 8% (from the previous 5%).
 
The last time Japan introduced a higher sales levy, in 1997, it was followed by years of deflation and tepid economic growth that defined the country's protracted slump. A Bloomberg survey of economists has forecasted for the Japanese economy to shrink an annualized 3.5% in the second quarter of the year, breaking a projected six straight quarters of growth.
 
Finance Minister Taro Aso said last week that the next few months will be key in a decision on whether to go ahead with a further increase in the sales tax to 10% as the government tries to rein in the world's largest public debt burden.
 
Easing to come later rather than sooner?
In a press conference held after the BoJ decision, its Governor Harihiko Kuroda - the former head of the Asian Development Bank hand-picked by Abe to help steer his growth bid - said while he expects the possibility that Japan's economy could slump in the second quarter of this year as a result of the tax hike, he is also expecting a rebound from the third quarter on improvements in jobs and income conditions.
 
According to CNBC, Kuroda's upbeat view suggests further easing may happen later rather than sonner. Kuroda had previously said he would not hesitate to expand monetary easing to reach the BoJ's 2% inflation goal around the end of fiscal 2014 through to early fiscal 2015.

In the meantime, market movements in Japan may hinge on upcoming Japanese data, especially retail sales figures for the month of April, will be closely watched for clues on the impact of the sales tax hike.

Bloomberg pointed out that stocks on the Tokyo Stock Exchange have fallen 5.3% this year, the biggest drop among major developed markets, after surging 51% last year. The gauge traded at 1.21 times book value yesterday, compared with 2.62x for the S&P 500 and 1.86x for the Stoxx Europe 600 Index.

Source: Macquarie Research - 9 Apr 2014