Yesterday, the Nikkei made its biggest advance  since 16 April and closed at its highest level in more than a week. The gain came despite the Bank of Japan’s (BoJ) announcement on Wednesday that they were refraining from boosting their stimulus.

Still no announcement on additional stimulus
The BoJ said on 21 May that they will continue to expand the monetary base at a pace of 60 trillion yen to 70 trillion yen (US$691 billion) per year. The central bank gave no indication that they will make additional stimulus, leading to a spike in the Japanese yen to a three-month high. The strengthening yen will add headwinds to BoJ Governor Haruhiko Kuroda’s bid to spur a 2% inflation. When BoJ first announced their unprecedented easing plans in 2013, the yen had weakened against the dollar, boosting import cost and helping to trigger gains in consumer prices from June last year. Inflation excluding fresh food -- the BoJ’s main price measure -- stayed at 1.3% in March for a fourth straight month.

In the meanwhile, the Japanese economy has also been forecasted to shrink an annualized 3.4% this quarter after 5.9% growth in the first three months of the year as the 3% tax increase depresses spending and led tp a 12% fall in department store sales for April.
Amidst the rising yen and lower economy growth forecast, 75% of economists polled by Bloomberg are expecting the BOJ to boost stimulus by the end of the year, with 38 percent seeing a move in July.

MER’s view on Japan
MER stated their opinion in an economic report published on Monday. 
 
The loss of momentum in Japan is becoming ever more apparent with downward revisions to 2014 real GDP growth having now been made by the Bank of Japan (BoJ) as well as the Cabinet Office, the IMF and the OECD. MER revised down their estimate in late March 2014. The consumption tax  rate increase on 1 April 2014 to 8% from 5% is expected to transfer 1.6% of GDP from the private sector to the government sector. After a strong 1Q 2014, real GDP growth will be negative in the second quarter and possibly the third quarter too (a technical recession).
 
MER is expecting the government to approve another public works heavy supplementary budget, and for the BOJ to extend through 2015 its current Quantitative and Qualitative Easing (QQE) program involving  substantial Japanese Government Bond purchases. A reformulated reform manifesto is expected end June 2014. MER is expecting incremental, but slow progress to continue.

Source: Macquarie Research - 23 May 2014