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FXPRIMUS Market Brief of the Week: Bank of Japan (BOJ) Needs to Learn from 1997

SINGAPORE, SINGAPORE -- (Marketwired) -- 04/04/14 -- In FXPRIMUS' Market Brief of The Week for 31 March, the brokerage firm's Senior Economist, Jimmy Zhu, looks at Japan's recent sales tax increase.

Economic Insights

Japan Needs To Take In 1997 as a Lesson When They Hiked Sales Tax

In April 1997, Japan raised its sales tax when broad economic indicators suggested that economy was gaining momentum. However, the consequences were unexpectedly shocking. Japan's growth fell into stagnation and immediately formed a downward trend. The benchmark equities index Nikkei 225 fell almost 30% in the second half of 1997.

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Japan may not wish to exercise this option now, as their economy just emerged from recession last year. Rising aging society remains a problem in the country. Japan's workers' income has been falling in a year on year basis, signalling that the current recovery remains fragile. BOJ should not take the risk of doing nothing at this time when it has to achieve its ambitious target around this time next year. We suspect that BOJ has been saving its last "trump card" to prevent another round of recession, or worst case scenarios.

Impact on Japanese Equities and Currency

Recent negative Japanese equities and positive Yen momentum may just be short-lived. Geopolitical risks and bad weather of U.S. in 2014 spurred investors to pursue safe havens in their portfolios such as U.S. Treasuries and Yen. It was not initiated by domestic economic condition. Nikkei 225 was unfortunately pulled down "south" due to its high negative correlation with the Japanese Yen.

Looking forward, Japanese Government Bond (JGB) 10-year yield has been lowered by 15%, indicating that bond investors would expect further easing from BOJ. U.S. Treasuries yield would continue to climb higher on a slightly more hawkish Federal Reserve (Fed) and improving U.S. data. We expect the U.S/Japan sovereigns' spread to widen further to 230 BPS in the next 3 months, pushing Yen further lower.

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Greenback May Be Supported By the Resilient U.S. Payrolls Figure This Week

February U.S. payrolls at 175,000 were impressive, given that the unusually terrible weather continues to hit labour market. Since weather has been better in March, more people are expected to return to work and complete their pending tasks in winter. It sets a boost for the level of employment in March, and this trend could be carry on in April and May.

Furthermore, U.S. weekly jobless claims have been falling substantially last month. If they are reliable, this would be an indicator that for the coming U.S. Nonfarm Payroll (NFP) prediction, March NFP could return to the 200k level again.

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