It's all about the consumption tax

For now, Japan's economy is following the script of the 1997 consumption tax hike. Consumer spending surged in a last-minute shopping spree before the tax was raised, and inflation soared in the capital region in April. While car sales weakened only slightly last month, surveys suggest that the outlook for Q2 is very poor. However, none of this is surprising, and we remain confident that the recovery will resume in the second half of the year. In the meantime, we still think that the BoJ has more work to do, which points to a renewed weakening of the yen and a rebound in the Nikkei towards year-end.