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Stimulus Hopes Rise for Japan, Equities Stay in Spotlight

NEW YORK (TheStreet) -- Developed market central banks will ensure equities remain the only game in town for investors.

That's the message from strategists, even as they are split on the prospect of further stimulus from the Bank of Japan this month. But all agree on one thing: the BoJ will do whatever it takes to help that economy.

In Europe, central bank President Mario Draghi has also reiterated a trigger-happy approach to stimulus. "We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required," he told reporters this week, as the ECB kept rates on hold at 0.25%.

Any central bank stimulus that acts to keep borrowing rates low will continue to bolster the relative appeal of shares over other asset classes. As such, some strategists say tepid economic data will be largely overlooked in economies where stimulus is used or likely to be used. The exception may be the U.S. where stimulus is being wound back on the premise that economic growth can be self-sustaining. Still, any addition to the global stimulus pool from Japan, Europe or China is expected to boost U.S. shares. 

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The Bank of Japan's meeting this month will face particular scrutiny given the Nikkei's recent lackluster performance. After notching 52.4% in 2013, the Nikkei has shed 5.3% for the year to date.

"We probably will see (more) stimulus and the market is hoping for it, they are committed to doing whatever it takes to jumpstart the economy," ING U.S. Investment market strategist Karyn Cavanaugh said in a phone interview. Japanese GDP notched just 0.7% in the final quarter of 2013, with poor results for capital expenditure and consumer spending.

Cavanaugh noted all major developed economies were stimulating their equity markets, even though the U.S. Fed Reserve was winding back its program.

"Global stimulus is good for everybody and Japan is still a major economy -- hopes for European stimulus are also helping the U.S. (markets)," she said. The strategist noted further Japanese stimulus would be good for U.S. companies and businesses with overseas operations. The Japanese are traditionally the biggest acquirers of U.S. assets, topping the pack again in 2014 with a 32.4% share of acquisitions and nearly $18 billion in deal value according to Dealogic.

The central bank's desire to rid Japan's economy of 15 years of deflation is another reason to add to stimulus, economists said.

A Bank of Japan survey this week forecast the inflation rate at 1.5% in a year's time, though market expectations have trailed official predictions.

"They have ongoing deflationary problems and we are heading for more stimulus," Rockwell Global Capital chief market economist Peter Cardillo said. He added that China, the world's second largest economy, was another strong candidate for using stimulus.

Other warn of volatility and believe the BoJ will wait.

Perpetual's head of investment market research, Matt Sherwood, said investors' diminishing faith in Abenomics meant Japanese equities were likely to be volatile in the coming three months.

Abenomics - a economic revival package that combines monetary and fiscal stimulus with structural reform - is seen as having failed to create sustainable economic growth, despite boosting share market confidence last year. 

Sherwood noted the impact of monetary and fiscal stimulus was fading just as the government introduced its first consumption tax rise in nearly two decades. The tax was raised from 5% to 8% this month and is one measure to help curb national debt that stands at almost 245% of GDP.

"Despite this uncertain backdrop, the BoJ will want to see any fall-out and therefore is unlikely to detail any stimulus plan at its April meeting," the Sydney-based Sherwood said.

Prudential Financial market strategist Quincy Krosby agreed, noting a "steady drip" of wage hike announcements - another move to help address deflation. "But investors expect the BoJ to intervene if it looks like the economy can't handle the higher tax. The commitment (from the central bank) is there," she said.

Sherwood said anticipated assurances from the BoJ that it was willing to unleash further stimulus would likely see the Yen decline against the US dollar and shares of Japanese exporters rally.

"Interestingly, the Yen has been stable against the US dollar for three months now and equities have declined 8% over this period, which may suggest investors are less convinced about the likely success of Abe's plan," he said.

The likely failure of structural reform would eventually weigh on sentiment and prompt investors to deploy capital to other economic regions, Sherwood said. 

Henderson Global Investors head of global equities, Matthew Beesley, said summer was a more likely time for stimulus. The London-based strategist noted that while a weaker yen had meant rising Japanese equities in yen terms, it not necessarily the case in US dollar terms.

He acknowledged that increases in global liquidity had been good for shares but that Japanese QE might have different consequences relative to US QE. This is because bond purchases by the US government created cash proceeds that needed reinvesting while the owner of a Japanese government bond would probably have different reinvestment needs, Beesely said.

"But it will lead to more liquidity in asset markets which at the very least is a neutral - and probably a plus," he said. "While Abe has the political capital and support of his party, further stimulus is very much on the agenda if needed."

-- By Jane Searle in New York

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